I just finished a draft of paper regarding the exclusion of the concept of power in economic theory.
Any comments will be appreciated.
http://michaelperelman.files.wordpress.com/2011/09/power.pdf
-->
Congratulations (maybe) to the Opera (Oscillation Project with Emulsion-Tracking Apparatus) team for their (possibly) revolutionary finding that a few neutrinos were able to defy Einstein and travel from Geneva to central Italy faster than the speed of light. If true, it will require a revision of basic physics that borders on science fiction.
I heard through the grapevine, however, that some senior scientists with this project did not give permission for their names to be on the article setting out the results, including one of the individuals who helped conceive and organize Opera from the start. They are passing up the opportunity to be connected to a historic breakthrough in their field. Why?
The answer is that, with such an extraordinary anomaly, there is a risk of error. Mismeasuring the distance within the apparatus by 12 meters, for instance, would reverse the results. Above all—and this is why economists should be interested—a physicist would suffer a huge, possibly irreparable blow to his or her career by being attached to a claim that is later found to be wrong. Type I error (false positives) are taken very seriously. The logic of this extreme asymmetry, so much weight on Type I, so much less on Type II, is explained in this earlier EconoSpeak post.
It’s rather different in economics, isn’t it? If someone shows you have made a false claim in a published article, you can write a gracious response thanking the critic and go on. More likely, you will double down and spin out more studies defending your original argument. Either way, if you’re wrong it’s no big deal. Lots of the top economists in the professional firmament have been wrong at one time or another (or even all the time), and it hasn’t set them back. Meanwhile, physics evolves over time toward ever-closer approximation of the real universe, while economics accumulates error along with insight.
UPDATE: Note that these neutrinos made their trip through the rugged terrain of the Alps and Apennines at an "impossible" speed. I think they should be checked for doping, and if they turn up positive they should be disqualified.
I rarely bother to read grand theories of economics (or politics or history) that fit into a blog post or even a short essay. How likely is it that someone has figured out a huge idea that generations of smart, knowledgeable people have all missed?
So you can stop reading here. In my defense, I recognize that most of the elements of what I’m about to say have been worked over rather thoroughly, but I’m not aware that anyone has put them together in quite this way.
It begins with the observation that credit performs two irreplaceable functions in a modern economy, income smoothing and reallocating resources to more productive uses. (a) Incomes are uncertain, but we can act more rationally if we can plan across their fluctuations. This is true of consumers who wish to avoid a feast-and-famine lifestyle (and can’t self-insure sufficiently through their own savings) and firms whose cash flow in any given period is unpredictable. Credit enables us to take a longer view. (b) Some means is needed to move income from where it has been earned in the past to where it can best be earned in the future. If you have better investment prospects than I do and can pay me a rate of interest that exceeds what I can get out of using my money myself, we are both better off, and the social efficiency of investment is improved.
Obvious, but the reason for beginning with this is to make it clear that, from a purely economic point of view, the credit relationship does not reflect or create an imbalance of virtue. It’s not about grasshoppers and ants or the provident and the prodigal, but simply an economic transaction that, if undertaken properly, is mutually, and socially, beneficial.
Of course, the expectations of lenders and borrowers can be in error. Some borrowers are dishonest, and so are some lenders. Credit terms may have depended on forecasts that prove to be wrong. How can the financial process be protected from the risk of default? On the borrower’s side, other than various types of specialized insurance, the only reliable protection is to limit the extent of leverage, but this is difficult to assess ex ante, since an unwillingness to leverage can undermine the original purposes that credit is intended to serve. Fortunately, while insolvency may be a hardship for individual borrowers, as long as the number of insolvencies is not too great at any time the financial process as a whole can withstand it.
The lender’s side is a bit different, because a capitalist economy will develop specialized lenders—financial institutions. They attempt to shield themselves from default risk by charging a risk premium. Pooled over a large number of transactions, the payment of this premium offsets the costs of default, at least if it has been correctly priced.
The system works well, in other words, as long as the frequency of default is relatively constant and predictable. This requires that default risk be uncorrelated within risk classes—that is, at the level of individual credit contracts. That is true most of the time. There are episodes, however, when risk at this level is correlated and defaults “bunch up”. An example is a financial bubble: everyone who has borrowed based on (erroneous) bubble expectations is going to be hard-pressed to service their debt. Another example is an unforeseen business cycle downturn.
When agents in the credit market face strongly correlated risks of default, the stability of the system is threatened from both sides. (a) Lots of borrowers are threatened with insolvency. They cut back on purchases they would otherwise make, and this causes a business cycle downturn, a “balance sheet recession”. The slump itself can then exacerbate the original correlated-risk condition. (b) Financial institutions can no longer cover their cumulative default losses with risk premium receipts. They too are threatened with insolvency. Their collective responses, such as calling in loans and dumping assets to shore up liquidity (Fisher’s debt deflation), also exacerbate the original problem.
Note: financial systems are more susceptible to these threats, ceteris paribus, if they have become highly leveraged; I take this to be Minsky’s core insight. Yet the problem I’m describing is logically separate from the degree of leverage. Rather, I am interested in what might be regarded as the “real” basis for financial instability, episodes in which the mistaken expectations that cause lenders to offer and borrowers to assume unserviceable debt (ex post) are highly correlated, leading to an otherwise unlikely surge of defaults.
The first-best solution, once such an episode has occurred, is to write off the bad debt as quickly as possible. This minimizes the depressive effect that troubled borrowers have on effective demand, and it enables financial institutions to resume their normally healthy pursuit of illiquidity through productive lending. One would expect border skirmishes between groups representing creditors and debtors, each asking the other to assume more of the costs, but it is in society’s collective interest to have the parties agree to such a writedown quickly, since the gains from restarting the economic machine far exceed the costs from a suboptimal choice of writedown criteria. This expeditious resolution of debt was Keynes’ preferred approach from Versailles onward.
But there are obstacles. One is ideological: in every society there is an opprobrium attached to being a debtor; the obligation to pay is not simply one of economic contract (whose expected risk of nonperformance is priced via the risk premium) but also of moral obligation. Thus resolutions that fail to impose the maximum possible pressure on debtors will be seen as destructive of the moral order. The other obstacle is that creditors are typically much richer and more powerful than debtors. They will fight proposals to reduce the liabilities of debtors with all the resources at their disposal. Instead, they favor bailouts, which are ostensibly aimed at helping the debtors, but in fact simply sustain debt service at public expense. They limit this support, however, because of their fear of moral hazard. Bailouts of sufficient magnitude have the positive effect of keeping the financial system afloat, but they are constrained by the preferences of creditors as well as the political and fiscal space available to the state, and they do little to remove the stultifying effects of bad debt on the economic engine.
This brings us to our current condition, today.
Nocera has a wide-eyed piece in this morning’s New York Times that touts a presentation by Paul Kasriel, an economist with Northern Trust. Kasriel has convinced Nocera (with “the force of revelation”) that there is a single economic problem hobbling us, unwillingness of banks to supply credit, and a single solution, more (and more and more) bond purchases by the Fed.
It’s painful to say this, but Kasriel seems to not understand that a reduction in lending could be driven either by shortage of demand or shortage of supply (or both). He simply assumes it comes from the supply side. With nonfinancial corporations sitting on something like $2 trillion in liquid reserves, could it just possibly be the case that demand is deficient? An oversight as fundamental as this is not just a random blip; it is the result of not thinking through the economic logic of a supposed argument.
I could burrow down into some of the details (yes, there is a credit constraint on small business, but this represents an intensification of a long-running problem in our dual economy; no, the collapsed ratio of credit creation to monetary base is not due to so much less of the numerator but so much more of the denominator, the old “pushing on a string”), but I’ll save your time and mine.
After venting on such peripheral matters as the fate of the global economy and the relationship between power and policy, I think it’s time to get to the really important stuff, like the painful misuse of “advocate for”.
It sounds terrible and it drives me crazy.
Once, long ago, we didn’t have this problem. No one ever advocated for anything, they just advocated. It was simple, clear and correct. Then, out of the world of social services, where “advocate” is a job title, came the practice of advocating for. People started by advocating for the homeless or low-income youth, which is fine, and ended up advocating for changes in tax policy or agency budget increases, which is not fine at all.
It comes down to the difference between means and ends. You advocate for an end. You advocate a means to that end. Are activists of such limited moral imagination that they think a higher tax bracket here or more regulations there are ends in themselves? It sure sounds this way. If your true goals are economic fairness and public health, however, you will advocate for them, and not for specific policies to bring them about.
The fight for maintaining linguistic distinctions is ultimately about maintaining mental distinctions. We need those.
This morning’s blogpile brought wise words from Jeffry Frieden about the Eurozone crisis. If you haven’t read it, follow this link straightaway. Even if you think you already know the whole story, his clarity and ability to get to the heart of the matter is a breath of fresh air. Naturally, I like his Keynesian take on the credit relationship:
Even though most industrialized economies are groaning under stagnant growth and high unemployment, elite opinion has it that the really important thing is to reduce fiscal deficits. This is orthodoxy in the US and gospel in Europe. Largely because of procyclical policy we are staring at a possible second dip into the Great Recession.
Among the many nasty outcomes of such a re-dip, one is sure to be a further deterioration in public debt-GDP ratios. Everything conspires to this: tax revenues will fall, transfers to the swelling ranks of the poor and unemployed will rise, and the denominator—GDP itself—will shrink. “Responsible fiscal policy” will be a victim of the downturn, and nothing can be done about it.
So let’s look ahead. Suppose we end up in this second dip, and government debt undergoes a new round of expansion: what then? If current debt-to-GDP ratios are “unsustainable”, what will the guardians of fiscal responsibility say about the even higher levels on the horizon? Is this another sort of doom loop, a downward spiral of economic collapse and self-defeating austerity?
I don’t have a crystal ball, but a little ground-level political economy is the next best thing. I predict that all concern about fiscal rectitude will be thrown out the window as soon as the next downturn takes hold. A sudden consensus will emerge everywhere that governments must borrow to the hilt in order to bail out investors and set a floor under effective demand. In fact, today’s austerian orthodoxy will vanish from public memory, as if it never existed.
After this it becomes a bit more difficult to forecast. As with all models, the political economy model (the dominant class of wealth-holders spans the feasible political space) ends up extrapolating from the past. It tells us that, after private portfolios are again rebalanced toward publicly issued assets in the crisis, concern will shift back to the solvency of sovereigns, and austerity will once more be on the table. But this assumes that learning does not take place.
And it also assumes that, in the next panic, there is no force, internal to the financial elite or outside them, that ejects them from the driver’s seat.
Over at Econbrowser, James Hamilton argues that environmental regulation may be a job-killer after all. There are two themes: the first is that US trade is weighted toward natural resources, and regulation is raising costs and reducing capacity in these tradables, and the second is that, in recessionary times, jobs lost due to regulations are not regained elsewhere. I think he overstates his points, but he clarifies important issues that tend to get muddied in economic debates.
Lets take the second first. I had argued that regulations tend to lower the measured productivity of workers in regulated industries, leading to some combination of more employment to restore output and expenditure-switching, as consumers shift to different products. Hamilton’s examples—California agriculture, Texas oil and lignite, Alabama cement kilns—do not dissuade me. We will continue to eat, power and pave, and if we do a bit less of some of this (especially the powering and paving), we can shift to more benign activities.
Hamilton is certainly right that it is important to observe gross and not only net labor flows into and out of employment; this has played a revolutionary role in our understanding the microeconomics of aggregate labor markets—search theory and all that. To assume, however, that increases in separations resulting from regulation will not be offset by increases in hiring is simply to assume that expenditure-switching does not take place. Does it?
Here is an example from my part of the world (at the moment). Back in 2000, the Social Democrat/Green coalition government of Germany announced plans to shut down that country’s nuclear power industry by 2020. When the Christian Democrat/Free Democrat coalition took over later in the decade, however, they backed off from this timetable. This sparked a wave of protests, heightened by the disaster at Fukushima. Now the CDU/FDP government has doubled back and endorsed a 2022 cutoff date.
Will this cause a loss of jobs? No doubt workers in the nuclear power sector will suffer, and they may be unable to find new work that pays as well as the old. But the nuclear phaseout is a boon to the offshore wind energy sector, where an influx of new investment is accelerating plans to turn the German Bight into a giant wind farm. (Building a forest of wind turbines, intersected by a few shipping lanes, will bring about a transformation of the marine environment as profound and unprecedented as any human beings have attempted, but that is a story for another day.) This is already leading to a hiring spurt, visible, for instance, in the town of Norden. In other words, expenditure switching can actually happen—although, in this case it is also assisted with a large dollop of industrial policy, yet another story for yet another day.
Hamilton’s first argument, that environmental regulations tend to target natural resources, which underpin the US trade position, is paradoxical, but you have to know the history of this issue to understand why. Beginning in the 1980s, environmentalists began to tell horror stories about how regulations were driving industries to third world export platforms—pollution havens—and that the fear of this effect was undermining regulation itself. You will find most of these examples in the popular press and in political broadsides of groups like Greenpeace and the Sierra Club, although a few made it into the journals. (See especially the work of the late Duane Chapman of Cornell, such as this.)
The economics profession responded to this “race to the bottom” claim by subjecting it to cross-section analysis: do industries with tighter environmental regulations tend to migrate to less-regulated regions, ceteris paribus? The result has been a bevy of studies, whose general conclusion is that this has not been the case, or at least not to any great extent. I’ll take this opportunity to state that I am not convinced by this work, for three reasons:
1. These studies do not usually control for shipping costs as a proportion of value added. Extractables have the biggest environmental costs, but they are also (with some exceptions) heavy and expensive to transport around the world. Failure to include this variable biases the estimated effect of regulation.
2. We do not have good direct measures of regulatory intensity, especially at the retail, enforcement level, and it is common to use proxies like pollution control expenditures. This conflates the full cost of environmental mitigation, however, with the incremental effect of regulation. Firms control pollution for a variety of reasons—potential tort liability, risk of damage to their equipment and operations, the occasional urge to do the right thing—and regulation is just one aspect. Whether the proxies really proxy what they purport is an open question, in my opinion.
3. Recall that the hypothesis in question is whether trade competition leads to a race to the bottom in environmental regulation. If it is true, it means that there will tend to be less regulation in contexts where trade impacts are envisioned. In other words, causation is suspected to run from trade exposure to regulation as well as the other way around. Models that treat regulation as exogenous, as all of them do, are therefore ruling out the hypothesis by assumption.
These are reasons to suspect that we still know very little about the race-to-the-bottom hypothesis. On the other hand, I don’t think we can simply generalize from the examples picked by advocates; some sort of aggregate analysis is needed. At the moment, all we can say is that the hypothesis seems to work in some cases, but its scope and scale are unknown.
Meanwhile, what is paradoxical about Hamilton’s post is that one of our best econometricians is going to battle against the econometric literature on the pollution haven effect by citing examples of specific regulations that he thinks will dampen our resource-based trade advantages. He’s using Greenpeace methodology, but with priorities reversed.
Finally, to tie up a couple of loose ends, mention needs to be made about offsetting mechanisms. Suppose there really is a pollution haven effect, and the US loses jobs because it increases regulation in tradables. Are there any processes that can spring into action to restore employment?
One, much beloved by trade theorists, is the doctrine of comparative advantage. According to this principle, regulation cannot alter the balance of trade, but only its composition. If we export less of this, we will import less of something else, so the new jobs will come in some other trade-competing industry. The problem, alas, is that the assumption that trade balances are unaffected at the margin (that they are determined solely by aggregate savings behavior) is just that, an assumption, and one that is contradicted by the weight of empirical evidence. That’s why it is reasonable to worry about races to the bottom in environment, labor, taxation, and other realms.
The other is the potential for monetary and fiscal policy to counteract adverse trade effects: if we lose jobs on the trade front, why not amp up macropolicy correspondingly? This is a complex issue, but, in the interest of bringing to a close a post that has already gone on much too long, let’s just say that expansionary policies are not completely free lunches, nor do they always work as advertised, nor is the political path to their realization unstrewn with obstacles. It’s not wise to ignore the employment effects of microeconomic policies under the assumption that they can be fixed at the macro level. But it is also true that macro policies can and should be adjusted in tandem with micro choices.
What are Germans supposed to make of this widely-reported analysis by USB?
Put morality aside for a moment. The economically rational solution is to wipe out the debt overhang as rapidly as possible, spreading the costs on the basis of ability to pay and the maintenance of political cohesion. The peripherals, and especially their wheeler-dealer classes, would take a hit, and so would banks and investors in the north. Taxpayers in the wealthier countries would have to dig into their pockets to recapitalize (and possibly take possession of) financial institutions unable to cope with big writedowns. All of this would be done quickly, with the understanding that, once growth resumes, it will take only a few years to make everyone better off again. After the mess has been cleaned up attention can be given to new rules, above all transparency, that will make it less likely that the worst credit excesses of the past decade will be repeated.
So much for rationality. It is ideology that bellows the loudest, against the paralysis of a fragmented political system in Europe that makes it difficult to agree on any plan that entails big-stakes cost-sharing.
I can understand why Keynes is an epithet in German political discourse. If you ask, people will say he was too tolerant of inflation, although Skidelsky’s biography makes it clear that Keynes could be an inflation hawk when hawks were needed in the aviary. No, Keynes’ real sin, and his most radical element, is that he saw the credit relationship in morally neutral terms. For him, lending and borrowing was not about vice, virtue or any other theological category. It was simply a means, sometimes well-undertaken, sometimes not, for shifting resources to better uses, meeting human needs and promoting the development of economic life. From The Economic Consequences of the Peace to the Bancor plan, Keynes called for a balanced, burden-sharing approach to credit crises: lenders and borrowers alike should adjust to cast off the effects of a bust and make possible a return to growth. The wealth of the creditors may give them more clout, but there is no reasonable basis for the argument that those who borrowed foolishly must be squeezed to the limit, while those who lent foolishly should be made whole.
(In fairness, German political leaders, from Merkel and Schäuble on down, have made it clear that banks holding the sovereign debt of peripherals should take a hit—but their demands on the indebted countries make it clear that the balance of hittedness should fall mainly on the south.)
Keynes would not be surprised by the UBS numbers. He would be horrified that his grandchildren (or their grandchildren), who should be enjoying a higher standard of living than any he had known, were still in the grips of atavistic economic doctrines.
So one would think after reading the opinions of party elders canvassed by the New York Times this morning. It’s as though he has Harry Truman perched on one shoulder and Jimmy Carter on the other, and it was the Truman side that drafted his latest speech.
If only he keeps listening to the Truman avatar and eschews the other, wimpy one, say the elders, he has a chance to get reelected.
But recall this vaunted jobs program: it is too small by a factor four or five to close the demand gap, it relies more on tax cuts than spending, and it falls far short of stopping the loss of state and local public jobs. Even its strongest supporters admit that it would be too little, too late to reverse the Great Recession if the Republicans allowed it to pass. Obama’s fighting side is apparently pretty soft too.
The silver lining in all of this is that Jimmy Carter has turned out to be a fantastic ex-president.
This post is an attempt to explain in a little more detail what I have been saying (for instance, here and here) about the political economy of the Great Recession and its perverse response. Of course, that would suggest an article or even a book, but who has time for that? So a blog post will have to do.
Here is a synopsis of the argument: in a world dominated by “real” capital—ownership tied to capital in place, managed by organizations in place—political power is exercised through pressure exerted by firms and industries on behalf of their particular interests. In the world we now live in, financial capital—assets organized into diversified portfolios—presses for the highest possible returns to investors based on the freedom to invest in anything, anywhere. These differences are ideological, reflected in different conceptions of how economies work and should be run, and political, yielding different policy outcomes. This is offered as a sweeping generalization, since we have not seen a wholesale shift from one configuration to the other in any country (OK, maybe Iceland for a few years), but it seems correct as a first approximation.
Let’s work inductively from a single example, health care reform in the US. From a political-economic perspective, both Clinton and Obama worked from the same premise, that reform could be achieved by peeling off large segments of the business community from support for private health insurers, pharmaceuticals and providers. The logic is straightforward: health care is a net cost for every employer outside the health sector, and their own self-interest should lead them to support programs that cut these costs and transfer more of them to the public sector. On this basisthe lions should lie down with the lambs Wal-Mart should join forces with Andy Stern and the SEIU, and the intense lobbying of the health care sector should be neutralized by everyone else.
But it didn’t work that way. For sure, many businesses put out press releases endorsing the broad outlines of the Clinton-Obama proposals, but the balance of power remained decisively anti-reform. In particular, the public option, that foot in the door for single-payer, didn’t have a chance, even though it would have been a significant force for cost reduction. How can this be?
My answer would be that Mitt Romney is right, corporations are people too. That is, the top tier of ownership and control is vested in individuals who act in their self interest and in accordance with their intellectual perspective—usually related. General Electric, for instance, may benefit as a corporate entity from lower health care costs, but those who own and run it are not tied to that firm, or its current facilities, markets or organizational hierarchies, for life. At the highest levels, individuals see their economic interest as that of maximizing the value of their personal portfolios. They want to earn as much as they can in the present, but they especially want high rates of return on their investments. If they have taken a position in the health sector, its distended profitability is a personal plus. (In fact, since GE, like most other corporations, sits on a large pile of cash, it should consider investments in health insurers and providers as an intelligent hedge.)
I don’t want to make the mechanistic claim that rich folks were just looking out for their health profits in the debate over health care. Far more, I suspect, they were motivated by principle. They truly believe that unfettered market forces, directing capital to its most profitable uses, drive the engine of growth. Government impingement on that freedom, or worse, government-run alternatives to privately-financed enterprises, cannot serve the common good. It is a coincidence that, in this view, personal wealth maximization coincides with good public policy.
A richer model would recognize that both “old” and “new” political-economic configurations are at work. Certainly the heavy expenditures of the health sector to defend its profits made a difference. For me, however, the key question is why there wasn’t a sufficient countervailing effort from other sectors, when the evidence is clear that exorbitant health costs are crushing the economy. The answer I propose is that, in the broader context of financialization, dueling lobbyists is not the right way to frame the politics.
A second example, even more poignant, is financial reform itself. It could not be clearer that what benefits the financial sector now threatens the livelihood of everyone else, but the political foundation for reigning it in does not exist. I leave to readers to flesh out the story—why the CEO’s of nonfinancial firms, for instance, are not beating the drums for deconcentration and tight regulation.
To repeat: this is description at a very general level. I don’t think the political economy of any modern country, much less the global system, is monolithic. Ideology is not a simple reflection of self-interest, and collective political behavior is a function of political organization and not just an arithmetic summing of individual beliefs. Above all, I am making quite a few empirical claims that ought to be backed up by careful observation and testing.
Like I said, this is just a blog post.
Paul Krugman has a post on gold prices. The basic idea is that if you have Hotelling pricing of gold (price rising at the rate of interest so that it reaches a backstop level at the moment the existing supply is exhausted), a fall in interest rates implies a higher initial price (initial effect) and a flatter price path (subsequent effect). Since interest rates are in fact falling, the expectation is that gold prices should rise in the current period but remain a lousy investment for the future, since the downside potential for interest rates is itself being depleted. One would have to flesh out this model with some parameters to see how well it performs for gold, but what about other commodities? In particular, what about oil?
If Hotelling pricing matters for oil, we should be seeing the same dynamic: price appreciation in the present and the prospect of slower price growth in the future. (Or price declines if interest rates rise.)
Of course, the oil-watching community is not exactly enthusiastic about Hotelling. For one thing, oil royalties are largely under the control of sovereign resource owners, and their motives have almost nothing to do with long run present value rent maximization. Indeed, they may well be motivated primarily by the fragility of their control over these rents: if you are the Saudi royal family, your primary thought about oil pricing is, at what price do I maximize my family’s future control over this rent extraction machine? In addition, uncertainties over stock and production constraints, and unforeseen fluctuations in these factors, defeat any possibility of Hotelling-type calculation. The result is that short run supply and demand are far more important than the pure theory of exhaustible resources would suggest.
And other scarce minerals? Is there any sign of a Hotelling price bump?
My interpretation is that Hotelling prices, like Western Civilization, falls into the category of nice ideas.
Matt Yglesias makes an important observation about the dismal recent labor market statistics:
Our graph shows total government employment since January 2007 as well as employment by state and local governments over the same period. Total government employment has actually been declining since the month Barack Obama became President. While Federal employment has risen very slightly on net during this period (it too has been falling of late), employment by state and local governments has declined by 650,000 over this same period. As far as the conservative theory that Matt alludes to, alas private employment has not risen to offset this Herbert Hoover fiscal policy.
Friday, September 30, 2011
Wednesday, September 28, 2011
Kotlikoff’s Five Ideas to Boost the Economy
Laurence Kotlikoff has put forth 5 proposals to get us closer to full employment. Proposal #4 – “get prices and wages unstuck” – has already been rightfully criticized and his fifth proposal is fiscal contraction, which is even more absurd. But what about his first 3 proposals?
Proposal #1 is “stop paying interest on bank reserves”, which Kotlikoff argues would encourage banks to make more loans. But that is exactly the hope of any expansionary move by the Federal Reserve. The problem is not so much that the banks don’t wish to make new loans but firms are as interested in taking out loans when aggregate demand is so depressed.
Proposal #3 is in the same vein as its goal is more investment demand – “compel corporate America to invest”:
Presidential jawboning as an inducement to increase investment? By the same logic – passing the President’s bill to increase public infrastructure investment would generate a similar self sustaining recovery. But then Kotlikoff rejects fiscal stimulus with this incredibly silly claim:
Which leaves us with his proposal #2:
I leave it to others to discuss how his creative proposal might work.
Proposal #1 is “stop paying interest on bank reserves”, which Kotlikoff argues would encourage banks to make more loans. But that is exactly the hope of any expansionary move by the Federal Reserve. The problem is not so much that the banks don’t wish to make new loans but firms are as interested in taking out loans when aggregate demand is so depressed.
Proposal #3 is in the same vein as its goal is more investment demand – “compel corporate America to invest”:
They are waiting for the economy to improve before they invest, but it won’t improve until they all do so. The president can help resolve this problem by assembling in one room the CEOs of the largest 1,000 U.S. companies and getting them to collectively pledge to double their U.S. investment over the next three years. If they all invested simultaneously, they would immediately create much of the demand needed to make their investments worthwhile.
Presidential jawboning as an inducement to increase investment? By the same logic – passing the President’s bill to increase public infrastructure investment would generate a similar self sustaining recovery. But then Kotlikoff rejects fiscal stimulus with this incredibly silly claim:
The president’s new-yet-familiar jobs bill entails more spending and more tax cuts, neither of which is affordable absent new revenue.
Which leaves us with his proposal #2:
President Barack Obama could call on the workers and shareholders in these companies to voluntarily hire 7.5 percent more workers and do everything possible to maintain the higher level of employment going forward. How, one might ask, would all the new workers be paid? Existing employees could agree to a 7.5 percent wage cut in exchange for immediately vested shares of their companies’ stock of equal value.
I leave it to others to discuss how his creative proposal might work.
Friday, September 23, 2011
Opera, Einstein, and Why Economics Is Not a Real Science
Congratulations (maybe) to the Opera (Oscillation Project with Emulsion-Tracking Apparatus) team for their (possibly) revolutionary finding that a few neutrinos were able to defy Einstein and travel from Geneva to central Italy faster than the speed of light. If true, it will require a revision of basic physics that borders on science fiction.
I heard through the grapevine, however, that some senior scientists with this project did not give permission for their names to be on the article setting out the results, including one of the individuals who helped conceive and organize Opera from the start. They are passing up the opportunity to be connected to a historic breakthrough in their field. Why?
The answer is that, with such an extraordinary anomaly, there is a risk of error. Mismeasuring the distance within the apparatus by 12 meters, for instance, would reverse the results. Above all—and this is why economists should be interested—a physicist would suffer a huge, possibly irreparable blow to his or her career by being attached to a claim that is later found to be wrong. Type I error (false positives) are taken very seriously. The logic of this extreme asymmetry, so much weight on Type I, so much less on Type II, is explained in this earlier EconoSpeak post.
It’s rather different in economics, isn’t it? If someone shows you have made a false claim in a published article, you can write a gracious response thanking the critic and go on. More likely, you will double down and spin out more studies defending your original argument. Either way, if you’re wrong it’s no big deal. Lots of the top economists in the professional firmament have been wrong at one time or another (or even all the time), and it hasn’t set them back. Meanwhile, physics evolves over time toward ever-closer approximation of the real universe, while economics accumulates error along with insight.
UPDATE: Note that these neutrinos made their trip through the rugged terrain of the Alps and Apennines at an "impossible" speed. I think they should be checked for doping, and if they turn up positive they should be disqualified.
Thursday, September 22, 2011
Does John Cornyn Not Realize that Capital Gains is a Form of Income?
I guess private citizens don’t have the right to express their own views on tax policy without the Republican Party demanding to see their tax return:
But what cracks me up is this statement from Senator Cornyn:
Capital gains allow one to either consume more or enjoy an increase in one’s wealth. So it is income – but income taxed at a much lower rate than other characterizations of income. Which is the point that people that Mr. Buffett are making. If someone does not understand this simple point – then why are they qualified to serve in the Senate?
Republicans on Capitol Hill have found a new hidden document conspiracy to push to now that President Obama's long-form birth certificate is a matter of public record. Warren Buffett, they demand, show us the tax return!
But what cracks me up is this statement from Senator Cornyn:
I know that Mr. Buffett's not likely to release his tax records but I'll bet what it'll show you is that most of what he earns is from capital gains, which is taxed at a 15 percent tax rate rather than deriving it as income [for] which he'd pay a much higher tax rate," Cornyn said. "If he doesn't derive ordinary income and if all of his, what he puts in his pocket is based on capital gains, I think that would be an important information.
Capital gains allow one to either consume more or enjoy an increase in one’s wealth. So it is income – but income taxed at a much lower rate than other characterizations of income. Which is the point that people that Mr. Buffett are making. If someone does not understand this simple point – then why are they qualified to serve in the Senate?
Dems to SuperCommittee – First Do No Harm (to employment)
Brian Beutler reports on a good idea from 11 Democratic Senators:
For many of us – the output gap and the resulting effect on employment prospects should be priority #1 with the need to close the budget gap in the long-run being priority #2. I suspect the folks at CBO would be most happy to report the estimated impact on employment as well as the deficit from any proposed bill. And it should be mandatory for journalists to accurately portray these findings.
The idea here is to require CBO to analyze the Super Committee bill's impact on employment -- not just budget deficits. The goal is for members to know, and for journalists to report, not just that the legislation reduces deficits by some trillions of dollars, but that it might cost a huge number of jobs. If that's the story, then they'll be more amenable to considering direct job creation measures or at the very least finding deficit savings that don't lead directly to furloughs and layoffs.
For many of us – the output gap and the resulting effect on employment prospects should be priority #1 with the need to close the budget gap in the long-run being priority #2. I suspect the folks at CBO would be most happy to report the estimated impact on employment as well as the deficit from any proposed bill. And it should be mandatory for journalists to accurately portray these findings.
Be Careful with Those “Sorry You Lost Your Job” Cards
I suppose it’s nice that Hallmark now has a line of cards you can send someone who’s been laid off. A word of caution, however: don’t send one to a coworker unless you know for sure they’ve been told.
The Paradox Of Pay Toilets Revisited
I have blogged previously on this obscure and odd topic, but staying in Europe for extended periods as I am doing now (based in Florence, Italy for the semester, but traveling around giving lectures) always reminds me of it. Plus, I have new observations on some of the supposed explanations.
So, the paradox is that in the supposedly more market capitalist US, there simply are no pay toilets, at least not overtly, although there were some a half century ago, usually with slot for coins on the doors of them, not somebody sitting at the entrance taking money for you even to get into one. However, in supposedly more socialist Europe, at least some of its countries, certainly including France, Italy, and Russia, one finds this latter in many public toilets: someone sitting at the entrance taking money before you can enter at all. Why?
One explanation I have heard is that it is an employment preserving device. However, increasingly I see those people being replaced by slots for coins in the newer ones at the entrances.
Another is that it is necessary to pay for their upkeep. Well, I was just in one the other day in Siena that had the woman out front taking money, but it was in terrible shape without even seats on the toilets. Yes, I grant that the newer ones are usually in good shape. But, this does not answer why we do not do this in the US. Indeed, in Virginia in the last few years the rest areas on the interstates were closed for awhile due to funding shortages (since reopened), but not a single solitary soul suggested publicly that maybe the resolution was to make people pay for using them.
In short, I do not see either the employment or paying for their upkeep arguments as holding much water. This remains basically a mystery to me. Somehow in the US we think releaving oneself for free is a divine right, even as audiences laugh and cheer at the idea of people dying who do not pay for health insurance, while in much of Europe it is taken for granted that one must pay to releave oneself, even as they have universal health insurance coverage.
BTW, I do recognize that de facto private toilets are often for pay in that businesses will make them available only to paying customers. But one finds this in about equal proportions in both the US and most of Europe as near as I can tell.
So, the paradox is that in the supposedly more market capitalist US, there simply are no pay toilets, at least not overtly, although there were some a half century ago, usually with slot for coins on the doors of them, not somebody sitting at the entrance taking money for you even to get into one. However, in supposedly more socialist Europe, at least some of its countries, certainly including France, Italy, and Russia, one finds this latter in many public toilets: someone sitting at the entrance taking money before you can enter at all. Why?
One explanation I have heard is that it is an employment preserving device. However, increasingly I see those people being replaced by slots for coins in the newer ones at the entrances.
Another is that it is necessary to pay for their upkeep. Well, I was just in one the other day in Siena that had the woman out front taking money, but it was in terrible shape without even seats on the toilets. Yes, I grant that the newer ones are usually in good shape. But, this does not answer why we do not do this in the US. Indeed, in Virginia in the last few years the rest areas on the interstates were closed for awhile due to funding shortages (since reopened), but not a single solitary soul suggested publicly that maybe the resolution was to make people pay for using them.
In short, I do not see either the employment or paying for their upkeep arguments as holding much water. This remains basically a mystery to me. Somehow in the US we think releaving oneself for free is a divine right, even as audiences laugh and cheer at the idea of people dying who do not pay for health insurance, while in much of Europe it is taken for granted that one must pay to releave oneself, even as they have universal health insurance coverage.
BTW, I do recognize that de facto private toilets are often for pay in that businesses will make them available only to paying customers. But one finds this in about equal proportions in both the US and most of Europe as near as I can tell.
Wednesday, September 21, 2011
A Simple but Possibly Correct Theory of the Capitalist Financial Process
I rarely bother to read grand theories of economics (or politics or history) that fit into a blog post or even a short essay. How likely is it that someone has figured out a huge idea that generations of smart, knowledgeable people have all missed?
So you can stop reading here. In my defense, I recognize that most of the elements of what I’m about to say have been worked over rather thoroughly, but I’m not aware that anyone has put them together in quite this way.
It begins with the observation that credit performs two irreplaceable functions in a modern economy, income smoothing and reallocating resources to more productive uses. (a) Incomes are uncertain, but we can act more rationally if we can plan across their fluctuations. This is true of consumers who wish to avoid a feast-and-famine lifestyle (and can’t self-insure sufficiently through their own savings) and firms whose cash flow in any given period is unpredictable. Credit enables us to take a longer view. (b) Some means is needed to move income from where it has been earned in the past to where it can best be earned in the future. If you have better investment prospects than I do and can pay me a rate of interest that exceeds what I can get out of using my money myself, we are both better off, and the social efficiency of investment is improved.
Obvious, but the reason for beginning with this is to make it clear that, from a purely economic point of view, the credit relationship does not reflect or create an imbalance of virtue. It’s not about grasshoppers and ants or the provident and the prodigal, but simply an economic transaction that, if undertaken properly, is mutually, and socially, beneficial.
Of course, the expectations of lenders and borrowers can be in error. Some borrowers are dishonest, and so are some lenders. Credit terms may have depended on forecasts that prove to be wrong. How can the financial process be protected from the risk of default? On the borrower’s side, other than various types of specialized insurance, the only reliable protection is to limit the extent of leverage, but this is difficult to assess ex ante, since an unwillingness to leverage can undermine the original purposes that credit is intended to serve. Fortunately, while insolvency may be a hardship for individual borrowers, as long as the number of insolvencies is not too great at any time the financial process as a whole can withstand it.
The lender’s side is a bit different, because a capitalist economy will develop specialized lenders—financial institutions. They attempt to shield themselves from default risk by charging a risk premium. Pooled over a large number of transactions, the payment of this premium offsets the costs of default, at least if it has been correctly priced.
The system works well, in other words, as long as the frequency of default is relatively constant and predictable. This requires that default risk be uncorrelated within risk classes—that is, at the level of individual credit contracts. That is true most of the time. There are episodes, however, when risk at this level is correlated and defaults “bunch up”. An example is a financial bubble: everyone who has borrowed based on (erroneous) bubble expectations is going to be hard-pressed to service their debt. Another example is an unforeseen business cycle downturn.
When agents in the credit market face strongly correlated risks of default, the stability of the system is threatened from both sides. (a) Lots of borrowers are threatened with insolvency. They cut back on purchases they would otherwise make, and this causes a business cycle downturn, a “balance sheet recession”. The slump itself can then exacerbate the original correlated-risk condition. (b) Financial institutions can no longer cover their cumulative default losses with risk premium receipts. They too are threatened with insolvency. Their collective responses, such as calling in loans and dumping assets to shore up liquidity (Fisher’s debt deflation), also exacerbate the original problem.
Note: financial systems are more susceptible to these threats, ceteris paribus, if they have become highly leveraged; I take this to be Minsky’s core insight. Yet the problem I’m describing is logically separate from the degree of leverage. Rather, I am interested in what might be regarded as the “real” basis for financial instability, episodes in which the mistaken expectations that cause lenders to offer and borrowers to assume unserviceable debt (ex post) are highly correlated, leading to an otherwise unlikely surge of defaults.
The first-best solution, once such an episode has occurred, is to write off the bad debt as quickly as possible. This minimizes the depressive effect that troubled borrowers have on effective demand, and it enables financial institutions to resume their normally healthy pursuit of illiquidity through productive lending. One would expect border skirmishes between groups representing creditors and debtors, each asking the other to assume more of the costs, but it is in society’s collective interest to have the parties agree to such a writedown quickly, since the gains from restarting the economic machine far exceed the costs from a suboptimal choice of writedown criteria. This expeditious resolution of debt was Keynes’ preferred approach from Versailles onward.
But there are obstacles. One is ideological: in every society there is an opprobrium attached to being a debtor; the obligation to pay is not simply one of economic contract (whose expected risk of nonperformance is priced via the risk premium) but also of moral obligation. Thus resolutions that fail to impose the maximum possible pressure on debtors will be seen as destructive of the moral order. The other obstacle is that creditors are typically much richer and more powerful than debtors. They will fight proposals to reduce the liabilities of debtors with all the resources at their disposal. Instead, they favor bailouts, which are ostensibly aimed at helping the debtors, but in fact simply sustain debt service at public expense. They limit this support, however, because of their fear of moral hazard. Bailouts of sufficient magnitude have the positive effect of keeping the financial system afloat, but they are constrained by the preferences of creditors as well as the political and fiscal space available to the state, and they do little to remove the stultifying effects of bad debt on the economic engine.
This brings us to our current condition, today.
Tuesday, September 20, 2011
A Little Basic Economics Would Go a Long Way for Paul Kasriel and Joe Nocera
Nocera has a wide-eyed piece in this morning’s New York Times that touts a presentation by Paul Kasriel, an economist with Northern Trust. Kasriel has convinced Nocera (with “the force of revelation”) that there is a single economic problem hobbling us, unwillingness of banks to supply credit, and a single solution, more (and more and more) bond purchases by the Fed.
It’s painful to say this, but Kasriel seems to not understand that a reduction in lending could be driven either by shortage of demand or shortage of supply (or both). He simply assumes it comes from the supply side. With nonfinancial corporations sitting on something like $2 trillion in liquid reserves, could it just possibly be the case that demand is deficient? An oversight as fundamental as this is not just a random blip; it is the result of not thinking through the economic logic of a supposed argument.
I could burrow down into some of the details (yes, there is a credit constraint on small business, but this represents an intensification of a long-running problem in our dual economy; no, the collapsed ratio of credit creation to monetary base is not due to so much less of the numerator but so much more of the denominator, the old “pushing on a string”), but I’ll save your time and mine.
Monday, September 19, 2011
Social Security v. the Republican Alternative
M.S. writing for The Economist notes:
This “goal” would represent two fundamental changes: (a) investing surplus funds in risky securities as opposed to government bonds; and (b) converting a defined benefits program to a defined contribution program. Part (a) was supposed to increase the expected return at the cost of bearing stock market risk – which as M.S. notes has witnessed average returns being well below expected returns of late. The Galveston Plan, however, implemented part (b) but kept surplus funds in a portfolio with lower risk and lower expected return. But not everyone was necessarily better off under this Galveston Plan.
Up until about 2007, the goal of such attacks was clear: conservatives wanted to replace it with a Chilean-style defined-contribution plan that would be invested in securities. Within its own assumptions, that programme did at least make sense; but since the financial crisis, and with average returns from Wall Street now sharply negative over an entire decade, both the logic and the political support for any such programme have evaporated.
This “goal” would represent two fundamental changes: (a) investing surplus funds in risky securities as opposed to government bonds; and (b) converting a defined benefits program to a defined contribution program. Part (a) was supposed to increase the expected return at the cost of bearing stock market risk – which as M.S. notes has witnessed average returns being well below expected returns of late. The Galveston Plan, however, implemented part (b) but kept surplus funds in a portfolio with lower risk and lower expected return. But not everyone was necessarily better off under this Galveston Plan.
Advocate vs Advocate For
After venting on such peripheral matters as the fate of the global economy and the relationship between power and policy, I think it’s time to get to the really important stuff, like the painful misuse of “advocate for”.
It sounds terrible and it drives me crazy.
Once, long ago, we didn’t have this problem. No one ever advocated for anything, they just advocated. It was simple, clear and correct. Then, out of the world of social services, where “advocate” is a job title, came the practice of advocating for. People started by advocating for the homeless or low-income youth, which is fine, and ended up advocating for changes in tax policy or agency budget increases, which is not fine at all.
It comes down to the difference between means and ends. You advocate for an end. You advocate a means to that end. Are activists of such limited moral imagination that they think a higher tax bracket here or more regulations there are ends in themselves? It sure sounds this way. If your true goals are economic fairness and public health, however, you will advocate for them, and not for specific policies to bring them about.
The fight for maintaining linguistic distinctions is ultimately about maintaining mental distinctions. We need those.
Eurozone 101
This morning’s blogpile brought wise words from Jeffry Frieden about the Eurozone crisis. If you haven’t read it, follow this link straightaway. Even if you think you already know the whole story, his clarity and ability to get to the heart of the matter is a breath of fresh air. Naturally, I like his Keynesian take on the credit relationship:
For two years, Europe’s governments have been grappling with how to address this continuing debt crisis. But most of the public discussions have been highly misleading. In Northern Europe, and especially Germany, the tone has been one of outraged indignation. This high moral tone is misplaced. Certainly many Southern European banks and households, and the Greek government, borrowed irresponsibly; but German and other Northern European banks and investors lent just as irresponsibly. It’s not clear that there’s any real ethical distance between irresponsible borrowers and irresponsible lenders.
The Hole at the Heart of the Left
This from a review by Beverly Gage of Michael Kazin’s book, American Dreamers: How the Left Changed a Nation:
The left is in crisis because its animating vision — of a world transformed through socialism — has all but collapsed. Kazin is right to note that not all leftists identified as Socialists or Communists, and not all have considered economics the central site of contest. But socialism was always the big idea that explained how issues like racial inequality, gender oppression and factory wages all fit together.
Exactly right. Socialism also played a crucial political role by mobilizing its followers into a counterforce against the dominant class. In its absence we are left with appeals to reason and morality: all well and good, but not enough if you think that power of the political-economic variety largely determines how the world works.
Saturday, September 17, 2011
After the Double Dip
Even though most industrialized economies are groaning under stagnant growth and high unemployment, elite opinion has it that the really important thing is to reduce fiscal deficits. This is orthodoxy in the US and gospel in Europe. Largely because of procyclical policy we are staring at a possible second dip into the Great Recession.
Among the many nasty outcomes of such a re-dip, one is sure to be a further deterioration in public debt-GDP ratios. Everything conspires to this: tax revenues will fall, transfers to the swelling ranks of the poor and unemployed will rise, and the denominator—GDP itself—will shrink. “Responsible fiscal policy” will be a victim of the downturn, and nothing can be done about it.
So let’s look ahead. Suppose we end up in this second dip, and government debt undergoes a new round of expansion: what then? If current debt-to-GDP ratios are “unsustainable”, what will the guardians of fiscal responsibility say about the even higher levels on the horizon? Is this another sort of doom loop, a downward spiral of economic collapse and self-defeating austerity?
I don’t have a crystal ball, but a little ground-level political economy is the next best thing. I predict that all concern about fiscal rectitude will be thrown out the window as soon as the next downturn takes hold. A sudden consensus will emerge everywhere that governments must borrow to the hilt in order to bail out investors and set a floor under effective demand. In fact, today’s austerian orthodoxy will vanish from public memory, as if it never existed.
After this it becomes a bit more difficult to forecast. As with all models, the political economy model (the dominant class of wealth-holders spans the feasible political space) ends up extrapolating from the past. It tells us that, after private portfolios are again rebalanced toward publicly issued assets in the crisis, concern will shift back to the solvency of sovereigns, and austerity will once more be on the table. But this assumes that learning does not take place.
And it also assumes that, in the next panic, there is no force, internal to the financial elite or outside them, that ejects them from the driver’s seat.
Thursday, September 15, 2011
Environmental Regulation and Jobs, Again
Over at Econbrowser, James Hamilton argues that environmental regulation may be a job-killer after all. There are two themes: the first is that US trade is weighted toward natural resources, and regulation is raising costs and reducing capacity in these tradables, and the second is that, in recessionary times, jobs lost due to regulations are not regained elsewhere. I think he overstates his points, but he clarifies important issues that tend to get muddied in economic debates.
Lets take the second first. I had argued that regulations tend to lower the measured productivity of workers in regulated industries, leading to some combination of more employment to restore output and expenditure-switching, as consumers shift to different products. Hamilton’s examples—California agriculture, Texas oil and lignite, Alabama cement kilns—do not dissuade me. We will continue to eat, power and pave, and if we do a bit less of some of this (especially the powering and paving), we can shift to more benign activities.
Hamilton is certainly right that it is important to observe gross and not only net labor flows into and out of employment; this has played a revolutionary role in our understanding the microeconomics of aggregate labor markets—search theory and all that. To assume, however, that increases in separations resulting from regulation will not be offset by increases in hiring is simply to assume that expenditure-switching does not take place. Does it?
Here is an example from my part of the world (at the moment). Back in 2000, the Social Democrat/Green coalition government of Germany announced plans to shut down that country’s nuclear power industry by 2020. When the Christian Democrat/Free Democrat coalition took over later in the decade, however, they backed off from this timetable. This sparked a wave of protests, heightened by the disaster at Fukushima. Now the CDU/FDP government has doubled back and endorsed a 2022 cutoff date.
Will this cause a loss of jobs? No doubt workers in the nuclear power sector will suffer, and they may be unable to find new work that pays as well as the old. But the nuclear phaseout is a boon to the offshore wind energy sector, where an influx of new investment is accelerating plans to turn the German Bight into a giant wind farm. (Building a forest of wind turbines, intersected by a few shipping lanes, will bring about a transformation of the marine environment as profound and unprecedented as any human beings have attempted, but that is a story for another day.) This is already leading to a hiring spurt, visible, for instance, in the town of Norden. In other words, expenditure switching can actually happen—although, in this case it is also assisted with a large dollop of industrial policy, yet another story for yet another day.
Hamilton’s first argument, that environmental regulations tend to target natural resources, which underpin the US trade position, is paradoxical, but you have to know the history of this issue to understand why. Beginning in the 1980s, environmentalists began to tell horror stories about how regulations were driving industries to third world export platforms—pollution havens—and that the fear of this effect was undermining regulation itself. You will find most of these examples in the popular press and in political broadsides of groups like Greenpeace and the Sierra Club, although a few made it into the journals. (See especially the work of the late Duane Chapman of Cornell, such as this.)
The economics profession responded to this “race to the bottom” claim by subjecting it to cross-section analysis: do industries with tighter environmental regulations tend to migrate to less-regulated regions, ceteris paribus? The result has been a bevy of studies, whose general conclusion is that this has not been the case, or at least not to any great extent. I’ll take this opportunity to state that I am not convinced by this work, for three reasons:
1. These studies do not usually control for shipping costs as a proportion of value added. Extractables have the biggest environmental costs, but they are also (with some exceptions) heavy and expensive to transport around the world. Failure to include this variable biases the estimated effect of regulation.
2. We do not have good direct measures of regulatory intensity, especially at the retail, enforcement level, and it is common to use proxies like pollution control expenditures. This conflates the full cost of environmental mitigation, however, with the incremental effect of regulation. Firms control pollution for a variety of reasons—potential tort liability, risk of damage to their equipment and operations, the occasional urge to do the right thing—and regulation is just one aspect. Whether the proxies really proxy what they purport is an open question, in my opinion.
3. Recall that the hypothesis in question is whether trade competition leads to a race to the bottom in environmental regulation. If it is true, it means that there will tend to be less regulation in contexts where trade impacts are envisioned. In other words, causation is suspected to run from trade exposure to regulation as well as the other way around. Models that treat regulation as exogenous, as all of them do, are therefore ruling out the hypothesis by assumption.
These are reasons to suspect that we still know very little about the race-to-the-bottom hypothesis. On the other hand, I don’t think we can simply generalize from the examples picked by advocates; some sort of aggregate analysis is needed. At the moment, all we can say is that the hypothesis seems to work in some cases, but its scope and scale are unknown.
Meanwhile, what is paradoxical about Hamilton’s post is that one of our best econometricians is going to battle against the econometric literature on the pollution haven effect by citing examples of specific regulations that he thinks will dampen our resource-based trade advantages. He’s using Greenpeace methodology, but with priorities reversed.
Finally, to tie up a couple of loose ends, mention needs to be made about offsetting mechanisms. Suppose there really is a pollution haven effect, and the US loses jobs because it increases regulation in tradables. Are there any processes that can spring into action to restore employment?
One, much beloved by trade theorists, is the doctrine of comparative advantage. According to this principle, regulation cannot alter the balance of trade, but only its composition. If we export less of this, we will import less of something else, so the new jobs will come in some other trade-competing industry. The problem, alas, is that the assumption that trade balances are unaffected at the margin (that they are determined solely by aggregate savings behavior) is just that, an assumption, and one that is contradicted by the weight of empirical evidence. That’s why it is reasonable to worry about races to the bottom in environment, labor, taxation, and other realms.
The other is the potential for monetary and fiscal policy to counteract adverse trade effects: if we lose jobs on the trade front, why not amp up macropolicy correspondingly? This is a complex issue, but, in the interest of bringing to a close a post that has already gone on much too long, let’s just say that expansionary policies are not completely free lunches, nor do they always work as advertised, nor is the political path to their realization unstrewn with obstacles. It’s not wise to ignore the employment effects of microeconomic policies under the assumption that they can be fixed at the macro level. But it is also true that macro policies can and should be adjusted in tandem with micro choices.
China Plans To Buy Italy As The Crisis Ends Italian Corporatism
Italian PM Berlusconi has managed to pass another round of austerity bills through the lower house of Italy's parliament, despite another round of sex scandals. This round includes as part of the effort to keep the funding countries of the eurozone helping them out, a massive privatization wave of state-owned enterprises: 431 at the municipal level, 19 at the provincial (county) level, 34 at the regione (state) level, and 25 at the federal level, with the crown jewels on the chopping block being those in the energy sector, ENI and Enel. La Republicca reports that the Chinese Investment Corporation (CIC), the main Chinese state sovereign fund, is interested in buying major portions of these, particularly the energy companies. Given that ENI has been the largest foreign company operating in the oil industry in Libya, this might allow the Chinese to make up for goofily backing the loser in the war there and likely getting frozen out of future deals.
This privatization wave would essentially end the legacy of state-owned enterprises in Italy that dates back to the corporatist approach implemented by Mussolini during the fascist period. Unlike in Nazi Germany where the name of the ruling party (National Socialist) made it look like a socialist party when in fact it nationalized nearly nothing, in Italy the fascist corporatism involved a lot of nationalizing in its effort to overcome class conflicts by strong natonalism, as it followed Roman Catholic doctines developed in the 19th century to counter the push for classic socialism based on a Marxist workers' uprising. As long noted by many conservative and libertarian critics, Mussolini first emerged in politics in Italy in WW I in the socialist movement, and only went to the hard nationalist right after the war, seizing power in 1922.
Whereas in Germany, there was a thorough-going restructuring of its economic system after WW II (large companies that supported the regime were broken up, such as IG Farben), this did not happen in Italy, where the local population tended to support the invading Americans against the Germans once Mussolini fell from power. Italy would become politically democratic in its own peculiar way after the war, there was only a limited amount of economic restructuring occurred, with only limited privatization of the sectors nationalized under fascism. There has been a gradual move to privatization in recent decades, but now under fiscal pressure from the crisis and the ECB reluctantly buying Italian bonds to keep the spreads over the equivalent German ones from exceeding 5% by too much, Italy is preparing for a truly massive wave of privatization that will profoundly alter the economic landscape, with many worried about what it will mean if indeed China ends up a major buyer of these companies.
This privatization wave would essentially end the legacy of state-owned enterprises in Italy that dates back to the corporatist approach implemented by Mussolini during the fascist period. Unlike in Nazi Germany where the name of the ruling party (National Socialist) made it look like a socialist party when in fact it nationalized nearly nothing, in Italy the fascist corporatism involved a lot of nationalizing in its effort to overcome class conflicts by strong natonalism, as it followed Roman Catholic doctines developed in the 19th century to counter the push for classic socialism based on a Marxist workers' uprising. As long noted by many conservative and libertarian critics, Mussolini first emerged in politics in Italy in WW I in the socialist movement, and only went to the hard nationalist right after the war, seizing power in 1922.
Whereas in Germany, there was a thorough-going restructuring of its economic system after WW II (large companies that supported the regime were broken up, such as IG Farben), this did not happen in Italy, where the local population tended to support the invading Americans against the Germans once Mussolini fell from power. Italy would become politically democratic in its own peculiar way after the war, there was only a limited amount of economic restructuring occurred, with only limited privatization of the sectors nationalized under fascism. There has been a gradual move to privatization in recent decades, but now under fiscal pressure from the crisis and the ECB reluctantly buying Italian bonds to keep the spreads over the equivalent German ones from exceeding 5% by too much, Italy is preparing for a truly massive wave of privatization that will profoundly alter the economic landscape, with many worried about what it will mean if indeed China ends up a major buyer of these companies.
Still Fighting the Good Fight
This I found in a TNR article about Elizabeth Warren's Senate run:
"Another staunch conservative, Barbara Anderson, president of the libertarian group Citizens for Limited Taxation and longtime weekly columnist for the Salem News, explained to me, “Harvard becomes a picture in the dictionary next to ‘overeducated liberals,’” adding that her son’s economics professor at the University of Massachusetts-Amherst had “kidnapped his brain.”
This is of course what happened to Peter in grad school. My own brain was kidnapped at AU!
"Another staunch conservative, Barbara Anderson, president of the libertarian group Citizens for Limited Taxation and longtime weekly columnist for the Salem News, explained to me, “Harvard becomes a picture in the dictionary next to ‘overeducated liberals,’” adding that her son’s economics professor at the University of Massachusetts-Amherst had “kidnapped his brain.”
This is of course what happened to Peter in grad school. My own brain was kidnapped at AU!
Social Security v. the Galveston Plan: the Privatization Debate Redux
PolitiFact is providing some important reporting on a claim being made by some of the GOP Presidential hopefuls:
Oh boy – it sure sounds like Herman Cain is arguing that privatization will lead to a better return than the current system. Theresa M. Wilson a few years ago did a comparative analysis of the two systems and noted that the Galveston strategy of investing retirement funds is conservative much like that strategy of the Social Security Trust Fund. In fact, the Galveston real return on its investments was only 4.62 percent over the 1981 to 1997 period as compared to a 4.88 percent return for Social Security funds over the same period.
So how can it be that the Galveston plan gave some participants more retirement funds? Well perhaps it is due in part to the fact that this plan is a defined contribution plan whereas Social Security is a defined benefits plan. As PolitiFacts notes:
It does appear that the Republican candidates for President want to return to the 2005 lies about how Social Security is inferior in every respect to defined contribution plans. I guess we have to relive this unfortunate debate.
"The city of Galveston, they opted out of the Social Security system way back in the '70s," Cain said. "And now, they retire with a whole lot more money. Why? For a real simple reason -- they have an account with their money on it. What I'm simply saying is we've got to restructure the program using a personal retirement account option in order to eventually make it solvent."
Oh boy – it sure sounds like Herman Cain is arguing that privatization will lead to a better return than the current system. Theresa M. Wilson a few years ago did a comparative analysis of the two systems and noted that the Galveston strategy of investing retirement funds is conservative much like that strategy of the Social Security Trust Fund. In fact, the Galveston real return on its investments was only 4.62 percent over the 1981 to 1997 period as compared to a 4.88 percent return for Social Security funds over the same period.
So how can it be that the Galveston plan gave some participants more retirement funds? Well perhaps it is due in part to the fact that this plan is a defined contribution plan whereas Social Security is a defined benefits plan. As PolitiFacts notes:
participants who had higher earnings and fewer or no dependents generally fared better under the Galveston plan, particularly over the near term. But workers with lower earnings and more dependents tend to receive more money under Social Security ... "It's a great plan if you have worked under the plan for many years, if you do not die and leave any dependents, if you are not divorced from someone covered in the plan and if you are not interested in having your retirement income stream protected against inflation," said Eric Kingson, a professor at Syracuse University's School of Social Work and a longtime skeptic of the plan. "Short-term workers who leave the plan receive little if any benefits for their work and do not have their years under the Galveston Plan covered by Social Security. Low-income working persons do not receive anything approaching the kind of protection they receive under Social Security."
It does appear that the Republican candidates for President want to return to the 2005 lies about how Social Security is inferior in every respect to defined contribution plans. I guess we have to relive this unfortunate debate.
Wednesday, September 14, 2011
Cutting Costs by Ending Private Military Contracts
A few years ago Peter W. Singer wrote on Outsourcing the Fight:
The Secretary of Defense back then – Dick Cheney – went onto be the CEO of Halliburton. Whatever happened to that chap?
Michael Froomkin reports on a study that dares to suggest that such privatization actually may increase costs (hat tip to Mark Thoma).
The good news is that a couple of important players may be listening:
In 1992 a relatively little-known, Texas-based oil services firm called Halliburton was awarded a $3.9 million Pentagon contract. Its task was to write a classified report on how private companies, like itself, could support the logistics of U.S. military deployments into countries with poor infrastructure. Conspiracy theories aside, it is hard to imagine that either the company or the client realized that 15 years later this contract (now called the Logistics Civilian Augmentation Program or LOGCAP) would be worth as much as $150 billion.
The Secretary of Defense back then – Dick Cheney – went onto be the CEO of Halliburton. Whatever happened to that chap?
Michael Froomkin reports on a study that dares to suggest that such privatization actually may increase costs (hat tip to Mark Thoma).
The good news is that a couple of important players may be listening:
Feinstein argued that the crucial parts of intelligence operations - the collection, exploitation and analysis of information - are "inherently governmental functions that should be done by government employees at one-third less the cost per employee." One week into his new role as CIA director, David Petraeus testified Thursday that contractors are at the top of his list of potential cuts in the new era of belt-tightening.
Tuesday, September 13, 2011
Is Social Security Worse Than A Ponzi Scheme?
Since Rick Perry declared Social Security to be a Ponzi scheme, much debate has erupted, with some pointing out that even such SS supporters as Paul Samuelson (in 1967) and Paul Krugman (in 1996) described it as a "Ponzi scheme that works." See http://marginalrevolution.com/marginalrevolution/2011/09/is-social-security-a-ponzi-scheme.html for more detailed discussion. Samuelson said that "The beauty of social insurance is that it is actuarially unsound," and then argued that it was OK to promise current workers more after they retired than they were paying in due to the high growth rate of the economy and the growing population. As all that slowed down, the system was adjusted in 1983 to have people pay in more and retire later, thus putting off the date of "unsustainability." The argument that SS is a Ponzi scheme is based on the fact that current recipients are past payers and rely on new recruits to pay, which was a part of the original scheme by Charles (Carlo) Ponzi in 1919-20, although varying in an important way from Social Security.
Now, it has come to pass that while I have not actually seen any blogposts on this, some on Facebook who do blog, such as libertarian Steve Horwitz, are declaring that not only is SS like a Ponzi scheme, it is actually worse than one due to being mandatory. Even though participants in Ponzi schemes are being defrauded with phoney information, they participate voluntarily (and in the case of the original scheme got their money back plus 50% if they moved fast enough). That SS is not voluntary thus supposedly makes it worse, given that supposedly people are being deceived about its "true nature," although anyone is free to ignore the rantings of various politicians and read the Social Security Administration Trustee reports, which are not at all fraudulent, even if they are not always all that easy to understand. Is there anything to this?
I think it may be worth revisiting the original Ponzi scheme to understand crucial differences, with some similarities. The main one is indeed that future current people pay in and then they receive benefits paid in by later payers. That it is mandatory is what guarantees that there will be payments in the future, even if some of this must be adjusted from time to time as growth rates and so on may change. Otherwise it is different, and not just because of the lack of fraud, even though people are amazingly ignorant about the nature of SS, including many young people believing that if the system goes "bankrupt," they will get nothing, whereas according to the mainline projection by the SSA, such a bankruptcy would lead to recipients in 2037 receiving on the order of 120% more in real terms than current recipients, a fact known to very few people apparently.
The key to Ponzi's original scheme was that there was no ongoing source of income beyond the upfront contributions of new recruits (who were promised 50% returns within 90 days). Ponzi claimed he was making the money in arbitraging foreign currencies, but he never engaged in a single such transaction (although he did buy two firms with the money). Once people put money in, they put no more in, and could only get money from new recruits joining. In the case of SS, it is not just some upfront payment that people make and then sit back to receive. They keep on paying in through the taxes, even if this is mandatory. But then all taxes are mandatory.
In fact, Social Security really is best described as "social insurance," the term first used by von Bismarck when he first proposed it in Germany in 1881 and used by FDR when he proposed it in 1935. Yes, it has some differences with private insurance, and is at least partly a welfare plan for old people dressed up to make it look like an investment, but it does indeed serve the insurance function of guaranteeing people against falling below a certain income level when they are old.
Indeed, this is worth keeping in mind when people start going on about how its returns are not as good as other investments (maybe), an issue in some sense aggravated by Samuelson's old remarks from a different era, when in fact there were positive returns for one paying in (at least on average, obviously depending on how long one lived). In private insurance one does not expect on average to earn a positive return, which is how private insurers make a profit. Some make a positive return, but most do not. They are paying for peace of mind, and that is what one is getting from Social Security.
In any case, the discourse on this topic has become severely degraded. I hope that this can be overcome in the near future, and that people can be better informed about what really is going on with the system.
Now, it has come to pass that while I have not actually seen any blogposts on this, some on Facebook who do blog, such as libertarian Steve Horwitz, are declaring that not only is SS like a Ponzi scheme, it is actually worse than one due to being mandatory. Even though participants in Ponzi schemes are being defrauded with phoney information, they participate voluntarily (and in the case of the original scheme got their money back plus 50% if they moved fast enough). That SS is not voluntary thus supposedly makes it worse, given that supposedly people are being deceived about its "true nature," although anyone is free to ignore the rantings of various politicians and read the Social Security Administration Trustee reports, which are not at all fraudulent, even if they are not always all that easy to understand. Is there anything to this?
I think it may be worth revisiting the original Ponzi scheme to understand crucial differences, with some similarities. The main one is indeed that future current people pay in and then they receive benefits paid in by later payers. That it is mandatory is what guarantees that there will be payments in the future, even if some of this must be adjusted from time to time as growth rates and so on may change. Otherwise it is different, and not just because of the lack of fraud, even though people are amazingly ignorant about the nature of SS, including many young people believing that if the system goes "bankrupt," they will get nothing, whereas according to the mainline projection by the SSA, such a bankruptcy would lead to recipients in 2037 receiving on the order of 120% more in real terms than current recipients, a fact known to very few people apparently.
The key to Ponzi's original scheme was that there was no ongoing source of income beyond the upfront contributions of new recruits (who were promised 50% returns within 90 days). Ponzi claimed he was making the money in arbitraging foreign currencies, but he never engaged in a single such transaction (although he did buy two firms with the money). Once people put money in, they put no more in, and could only get money from new recruits joining. In the case of SS, it is not just some upfront payment that people make and then sit back to receive. They keep on paying in through the taxes, even if this is mandatory. But then all taxes are mandatory.
In fact, Social Security really is best described as "social insurance," the term first used by von Bismarck when he first proposed it in Germany in 1881 and used by FDR when he proposed it in 1935. Yes, it has some differences with private insurance, and is at least partly a welfare plan for old people dressed up to make it look like an investment, but it does indeed serve the insurance function of guaranteeing people against falling below a certain income level when they are old.
Indeed, this is worth keeping in mind when people start going on about how its returns are not as good as other investments (maybe), an issue in some sense aggravated by Samuelson's old remarks from a different era, when in fact there were positive returns for one paying in (at least on average, obviously depending on how long one lived). In private insurance one does not expect on average to earn a positive return, which is how private insurers make a profit. Some make a positive return, but most do not. They are paying for peace of mind, and that is what one is getting from Social Security.
In any case, the discourse on this topic has become severely degraded. I hope that this can be overcome in the near future, and that people can be better informed about what really is going on with the system.
Monday, September 12, 2011
The Three Components of Investment Demand – How Barro & Mankiw Are Talking Past Baker and DeLong
Dean Baker is not happy with something Greg Mankiw wrote:
Mankiw then uses this observation to promote a pro-business agenda as if restoring investment demand was the key to having a vigorous economic recovery. Robert Barro is making a similar argument (something we’ll come back to shortly):
Dean objects making a point that Brad DeLong also made:
To be fair to Dr. Mankiw – he knows the part about depressed residential investment and he argued that non-residential investment is also lower than it was pre-recession. Then again: non-residential investment includes both business investment in equipment and software which has recovered and nonresidential construction, which has not recovered as well.
Paul Krugman is not at all pleased with this Barro-Mankiw argument noting:
In a way, the fact that business investment is equipment and software has recovered even though the economy has not is amazing. And I wish these debaters would focus on what is going on with respect to nonresidential construction. But I have a separate question for Dr. Barro who writes:
This proposal strikes me as one that would be useful if the problem were too little nationals savings but my read of the current macroeconomy is that we have more national savings than investment even at very low interest rates. Is Dr. Barro really saying that if we save more we magically invest more? If so, I’m wondering how carefully he actually read the General Theory.
The most volatile component of G.D.P. over the business cycle is spending on investment goods. This spending category includes equipment, software, inventory accumulation, and residential and nonresidential construction. And the recent economic downturn offers this case in point about the problem: From the economy’s peak in the fourth quarter of 2007 to the recession’s official end, G.D.P. fell by only 5.1 percent, while investment spending fell by a whopping 34 percent.
Mankiw then uses this observation to promote a pro-business agenda as if restoring investment demand was the key to having a vigorous economic recovery. Robert Barro is making a similar argument (something we’ll come back to shortly):
The administration’s $800 billion stimulus program raised government demand for goods and services and was also intended to stimulate consumer demand. These interventions are usually described as Keynesian, but as John Maynard Keynes understood in his 1936 masterwork, “The General Theory of Employment, Interest and Money” (the first economics book I read), the main driver of business cycles is investment. As is typical, the main decline in G.D.P. during the recession showed up in the form of reduced investment by businesses and households. What drives investment? Stable expectations of a sound economic environment, including the long-run path of tax rates, regulations and so on. And employment is akin to investment in that hiring decisions take into account the long-run economic climate. The lesson is that effective incentives for investment and employment require permanence and transparency. Measures that are transient or uncertain will be ineffective.
Dean objects making a point that Brad DeLong also made:
American businesses are not scared and are not pulling in their horns--rather, they are investing for the future at a furious rate. Business investment in equipment and software is back to its pre-recession peak--it is investment in residential construction that is depressed
To be fair to Dr. Mankiw – he knows the part about depressed residential investment and he argued that non-residential investment is also lower than it was pre-recession. Then again: non-residential investment includes both business investment in equipment and software which has recovered and nonresidential construction, which has not recovered as well.
Paul Krugman is not at all pleased with this Barro-Mankiw argument noting:
investment is high when demand is strong and firms see a good reason to expand capacity. So the best thing we could do to spur business investment would be to get a recovery going by whatever means necessary, including fiscal stimulus.
In a way, the fact that business investment is equipment and software has recovered even though the economy has not is amazing. And I wish these debaters would focus on what is going on with respect to nonresidential construction. But I have a separate question for Dr. Barro who writes:
I propose a consumption tax, an idea that offends many conservatives, and elimination of the corporate income tax, a proposal that outrages many liberals.
This proposal strikes me as one that would be useful if the problem were too little nationals savings but my read of the current macroeconomy is that we have more national savings than investment even at very low interest rates. Is Dr. Barro really saying that if we save more we magically invest more? If so, I’m wondering how carefully he actually read the General Theory.
Sunday, September 11, 2011
The Ideology of Creditor Countries, Starting with Germany
What are Germans supposed to make of this widely-reported analysis by USB?
Even if a stronger country like Germany were to leave [the Euro], UBS still thinks it is going to set every German back by about EUR6,000 to EUR8,000 in the first year and then around EUR3,500 to EUR4,500 per person in every year thereafter. A stronger euro-zone country wouldn't face sovereign default but it is still vulnerable to corporate default, recapitalization of the banking system and a collapse of international trade.
By contrast, each German would only have to cough up EUR1,000 just once to bail out Greece, Ireland and Portugal entirely, according to UBS's analysis.If it were just a matter of self-interest, German politicians would be falling all over each other, promising to bail out the indebted European peripherals. But this would contradict the fundamental world view shared by nearly every voter: saving is good and borrowing is bad. The indebted countries borrowed too much, enjoying their decade of fun, and it would be immoral to ask the upright, productive citizens of the wealthier north to foot the bill. Wouldn’t this just encourage even worse behavior in the future?
Put morality aside for a moment. The economically rational solution is to wipe out the debt overhang as rapidly as possible, spreading the costs on the basis of ability to pay and the maintenance of political cohesion. The peripherals, and especially their wheeler-dealer classes, would take a hit, and so would banks and investors in the north. Taxpayers in the wealthier countries would have to dig into their pockets to recapitalize (and possibly take possession of) financial institutions unable to cope with big writedowns. All of this would be done quickly, with the understanding that, once growth resumes, it will take only a few years to make everyone better off again. After the mess has been cleaned up attention can be given to new rules, above all transparency, that will make it less likely that the worst credit excesses of the past decade will be repeated.
So much for rationality. It is ideology that bellows the loudest, against the paralysis of a fragmented political system in Europe that makes it difficult to agree on any plan that entails big-stakes cost-sharing.
I can understand why Keynes is an epithet in German political discourse. If you ask, people will say he was too tolerant of inflation, although Skidelsky’s biography makes it clear that Keynes could be an inflation hawk when hawks were needed in the aviary. No, Keynes’ real sin, and his most radical element, is that he saw the credit relationship in morally neutral terms. For him, lending and borrowing was not about vice, virtue or any other theological category. It was simply a means, sometimes well-undertaken, sometimes not, for shifting resources to better uses, meeting human needs and promoting the development of economic life. From The Economic Consequences of the Peace to the Bancor plan, Keynes called for a balanced, burden-sharing approach to credit crises: lenders and borrowers alike should adjust to cast off the effects of a bust and make possible a return to growth. The wealth of the creditors may give them more clout, but there is no reasonable basis for the argument that those who borrowed foolishly must be squeezed to the limit, while those who lent foolishly should be made whole.
(In fairness, German political leaders, from Merkel and Schäuble on down, have made it clear that banks holding the sovereign debt of peripherals should take a hit—but their demands on the indebted countries make it clear that the balance of hittedness should fall mainly on the south.)
Keynes would not be surprised by the UBS numbers. He would be horrified that his grandchildren (or their grandchildren), who should be enjoying a higher standard of living than any he had known, were still in the grips of atavistic economic doctrines.
Saturday, September 10, 2011
Did the “Good Obama” Step Forward in the Jobs Speech?
So one would think after reading the opinions of party elders canvassed by the New York Times this morning. It’s as though he has Harry Truman perched on one shoulder and Jimmy Carter on the other, and it was the Truman side that drafted his latest speech.
If only he keeps listening to the Truman avatar and eschews the other, wimpy one, say the elders, he has a chance to get reelected.
But recall this vaunted jobs program: it is too small by a factor four or five to close the demand gap, it relies more on tax cuts than spending, and it falls far short of stopping the loss of state and local public jobs. Even its strongest supporters admit that it would be too little, too late to reverse the Great Recession if the Republicans allowed it to pass. Obama’s fighting side is apparently pretty soft too.
The silver lining in all of this is that Jimmy Carter has turned out to be a fantastic ex-president.
Friday, September 9, 2011
Political Economy and Financialization
This post is an attempt to explain in a little more detail what I have been saying (for instance, here and here) about the political economy of the Great Recession and its perverse response. Of course, that would suggest an article or even a book, but who has time for that? So a blog post will have to do.
Here is a synopsis of the argument: in a world dominated by “real” capital—ownership tied to capital in place, managed by organizations in place—political power is exercised through pressure exerted by firms and industries on behalf of their particular interests. In the world we now live in, financial capital—assets organized into diversified portfolios—presses for the highest possible returns to investors based on the freedom to invest in anything, anywhere. These differences are ideological, reflected in different conceptions of how economies work and should be run, and political, yielding different policy outcomes. This is offered as a sweeping generalization, since we have not seen a wholesale shift from one configuration to the other in any country (OK, maybe Iceland for a few years), but it seems correct as a first approximation.
Let’s work inductively from a single example, health care reform in the US. From a political-economic perspective, both Clinton and Obama worked from the same premise, that reform could be achieved by peeling off large segments of the business community from support for private health insurers, pharmaceuticals and providers. The logic is straightforward: health care is a net cost for every employer outside the health sector, and their own self-interest should lead them to support programs that cut these costs and transfer more of them to the public sector. On this basis
But it didn’t work that way. For sure, many businesses put out press releases endorsing the broad outlines of the Clinton-Obama proposals, but the balance of power remained decisively anti-reform. In particular, the public option, that foot in the door for single-payer, didn’t have a chance, even though it would have been a significant force for cost reduction. How can this be?
My answer would be that Mitt Romney is right, corporations are people too. That is, the top tier of ownership and control is vested in individuals who act in their self interest and in accordance with their intellectual perspective—usually related. General Electric, for instance, may benefit as a corporate entity from lower health care costs, but those who own and run it are not tied to that firm, or its current facilities, markets or organizational hierarchies, for life. At the highest levels, individuals see their economic interest as that of maximizing the value of their personal portfolios. They want to earn as much as they can in the present, but they especially want high rates of return on their investments. If they have taken a position in the health sector, its distended profitability is a personal plus. (In fact, since GE, like most other corporations, sits on a large pile of cash, it should consider investments in health insurers and providers as an intelligent hedge.)
I don’t want to make the mechanistic claim that rich folks were just looking out for their health profits in the debate over health care. Far more, I suspect, they were motivated by principle. They truly believe that unfettered market forces, directing capital to its most profitable uses, drive the engine of growth. Government impingement on that freedom, or worse, government-run alternatives to privately-financed enterprises, cannot serve the common good. It is a coincidence that, in this view, personal wealth maximization coincides with good public policy.
A richer model would recognize that both “old” and “new” political-economic configurations are at work. Certainly the heavy expenditures of the health sector to defend its profits made a difference. For me, however, the key question is why there wasn’t a sufficient countervailing effort from other sectors, when the evidence is clear that exorbitant health costs are crushing the economy. The answer I propose is that, in the broader context of financialization, dueling lobbyists is not the right way to frame the politics.
A second example, even more poignant, is financial reform itself. It could not be clearer that what benefits the financial sector now threatens the livelihood of everyone else, but the political foundation for reigning it in does not exist. I leave to readers to flesh out the story—why the CEO’s of nonfinancial firms, for instance, are not beating the drums for deconcentration and tight regulation.
To repeat: this is description at a very general level. I don’t think the political economy of any modern country, much less the global system, is monolithic. Ideology is not a simple reflection of self-interest, and collective political behavior is a function of political organization and not just an arithmetic summing of individual beliefs. Above all, I am making quite a few empirical claims that ought to be backed up by careful observation and testing.
Like I said, this is just a blog post.
Thursday, September 8, 2011
Romney on Free Trade and the Trade Adjustment Assistance Program
The Trade Policy section of Mitt Romney’s Believe in America argues that:
Romney then accuses President Obama of stalling to put forth Free Trade Agreements with 3 nations. Let’s step back from his rhetoric to correct the record on several matters. President Reagan’s track record on free trade was not as great as Mr. Romney pretends. Neither was the free trade track record of George W. Bush.
As far as the delays in putting forth the most recent Free Trade Agreements, Ron Kirk notes:
Mr. Romney notes that this may be the holdup but then criticizes the program as if it were some sort of government dole to labor unions. Protection for corporations (they are people too) but not for workers – go figure!
But let’s recall that it was President Kennedy that first proposed this program as part of the “Kennedy Round”, which proposed to sharply curtail tariffs. When Mr. Romney claims that the White House recognized the benefits of open markets in the 1980’s, he was only off by 20 years.
Open markets have helped make America powerful and prosperous. Indeed, they have been one of the keys to our economic success since the country was founded … Every president beginning with Ronald Reagan has recognized this and acted upon it. President Reagan signed America’s first Free Trade Agreement (FTA), with Israel in 1985. George H. W. Bush and Bill Clinton both worked to negotiate and implement the North American Free Trade Agreement (NAFTA), which went into effect in 1994. George W. Bush successfully negotiated eleven FTAs, encompassing sixteen countries … Of course, opening markets must be a two-way street. For America truly to benefit in global commerce, we need to ensure there is access for our entrepreneurs to sell their high-quality products and services. This means that agreements must protect intellectual property from those who would violate the rules of free enterprise. Too often, trade agreements do not adequately address these concerns. Even when they do, actual enforcement lags.
Romney then accuses President Obama of stalling to put forth Free Trade Agreements with 3 nations. Let’s step back from his rhetoric to correct the record on several matters. President Reagan’s track record on free trade was not as great as Mr. Romney pretends. Neither was the free trade track record of George W. Bush.
As far as the delays in putting forth the most recent Free Trade Agreements, Ron Kirk notes:
We have also been insisting that Congress include the other element of our trade package – the Trade Adjustment Assistance program, which is a safety net for workers who, through no fault of their own, may be displaced from their jobs [because of increased imports]. Congress allowed that program to expire in February, and we've been working with them on a way to get it renewed. Democrats would prefer to move on the Trade Adjustment Assistance program first. The Republicans have insisted that we move on the [free trade agreements] first and do Trade Adjustment Assistance later. We've been trying to find a way to move everything forward at the same time. That's been the holdup.
Mr. Romney notes that this may be the holdup but then criticizes the program as if it were some sort of government dole to labor unions. Protection for corporations (they are people too) but not for workers – go figure!
But let’s recall that it was President Kennedy that first proposed this program as part of the “Kennedy Round”, which proposed to sharply curtail tariffs. When Mr. Romney claims that the White House recognized the benefits of open markets in the 1980’s, he was only off by 20 years.
Wednesday, September 7, 2011
Believe in America Is Not Going to Create 11 Million New Jobs by 2016
Did I really hear Mitt Romney say his economic plan will create 11 million new jobs in 4 years and witness 4 percent growth per year during this period? This story confirms as much:
This may sound very ambitious to some but even if the U.S. economy witnessed this type of GDP and employment rebound, we would still be far from full employment. During each of Clinton’s two years in the White House, we saw employment grow by more than 9 million per term as real GDP growth did average about 3.6 percent per year. When Clinton became President, the employment to population ratio was 61.4 percent. It is only 58.2 percent now. Romney’s goal seems to be to get this back to around 61 percent by the end of 2016. Not exactly believing in America!
Here is the plan. Besides a lot of Obama bashing, it has the usual GOP talking points about balancing the budget as we cuts taxes, regulations, and trade barriers. Glenn Hubbard wrote the Forward, which includes this:
Growth groove? Of course, he notes that the 4 percent is an “aggressive goal” without predicting that any of these 59 proposals will actually achieve this goal.
Republican presidential candidate Mitt Romney announced his agenda for job creation Tuesday with a bold goal at its core: 11 million new jobs during the first four years of a Romney administration ... Specifically, Romney sketched his vision that the economy would grow at 4 percent a year under his watch, if elected in 2012. That would be significantly faster growth than the 3.6 percent pace predicted recently by the Congressional Budget Office for the years 2013 to 2016 (essentially the years of the next presidential term). And many economists say that even 3.6 percent growth may be an optimistic forecast.
This may sound very ambitious to some but even if the U.S. economy witnessed this type of GDP and employment rebound, we would still be far from full employment. During each of Clinton’s two years in the White House, we saw employment grow by more than 9 million per term as real GDP growth did average about 3.6 percent per year. When Clinton became President, the employment to population ratio was 61.4 percent. It is only 58.2 percent now. Romney’s goal seems to be to get this back to around 61 percent by the end of 2016. Not exactly believing in America!
Here is the plan. Besides a lot of Obama bashing, it has the usual GOP talking points about balancing the budget as we cuts taxes, regulations, and trade barriers. Glenn Hubbard wrote the Forward, which includes this:
America needs to get its growth groove back. And getting it back is about not just incomes, but jobs as well. To bring the unemployment rate back to its pre-financial-crisis level by the end of the next president’s first term would require real GDP growth averaging 4 percent per year over that period. That is an aggressive goal, but great progress can be made.
Growth groove? Of course, he notes that the 4 percent is an “aggressive goal” without predicting that any of these 59 proposals will actually achieve this goal.
Tuesday, September 6, 2011
Gold and Oil
Paul Krugman has a post on gold prices. The basic idea is that if you have Hotelling pricing of gold (price rising at the rate of interest so that it reaches a backstop level at the moment the existing supply is exhausted), a fall in interest rates implies a higher initial price (initial effect) and a flatter price path (subsequent effect). Since interest rates are in fact falling, the expectation is that gold prices should rise in the current period but remain a lousy investment for the future, since the downside potential for interest rates is itself being depleted. One would have to flesh out this model with some parameters to see how well it performs for gold, but what about other commodities? In particular, what about oil?
If Hotelling pricing matters for oil, we should be seeing the same dynamic: price appreciation in the present and the prospect of slower price growth in the future. (Or price declines if interest rates rise.)
Of course, the oil-watching community is not exactly enthusiastic about Hotelling. For one thing, oil royalties are largely under the control of sovereign resource owners, and their motives have almost nothing to do with long run present value rent maximization. Indeed, they may well be motivated primarily by the fragility of their control over these rents: if you are the Saudi royal family, your primary thought about oil pricing is, at what price do I maximize my family’s future control over this rent extraction machine? In addition, uncertainties over stock and production constraints, and unforeseen fluctuations in these factors, defeat any possibility of Hotelling-type calculation. The result is that short run supply and demand are far more important than the pure theory of exhaustible resources would suggest.
And other scarce minerals? Is there any sign of a Hotelling price bump?
My interpretation is that Hotelling prices, like Western Civilization, falls into the category of nice ideas.
The Shrinking Public Sector
Matt Yglesias makes an important observation about the dismal recent labor market statistics:
Looks like we had 17,000 thousand new private sector jobs in August, which were 100 percent offset by 17,000 lost jobs in the public sector. The striking zero result should galvanize minds, but it’s worth noting that this has been the trend all year. The public sector has been steadily shrinking. According to the conservative theory of the economy, when the public sector shrinks that should super-charge the private sector. What’s happened in the real world has been that public sector shrinkage has simply been paired with anemic private sector growth.
Our graph shows total government employment since January 2007 as well as employment by state and local governments over the same period. Total government employment has actually been declining since the month Barack Obama became President. While Federal employment has risen very slightly on net during this period (it too has been falling of late), employment by state and local governments has declined by 650,000 over this same period. As far as the conservative theory that Matt alludes to, alas private employment has not risen to offset this Herbert Hoover fiscal policy.
Monday, September 5, 2011
The Free Market: Looting, Shooting, and Polluting
I uploaded a Youtube post. I used up my time before I was able to pull everything together. Here is the url:
Subscribe to:
Posts (Atom)
