EconoSpeak

"What this country needs is another financial crisis"

2013-05-24T13:32:00.003-04:00

That is just the headline in today's Washington Post for a column by semi-retired Allan Sloan, who says in the text, "What this country needs to get its act together is a good five-alarm financial crisis." Really. He does not mean it, as he gets worked up about Republicans possibly damaging US credit with another debt ceiling crisis later this year, but he certainly said it, and this is clearly a very strongly felt sentiment among Washington VSPs, even though we have still not come out of the high unemployment from the last financial crisis. This is not what bothers him. He seems upset that the stock market is doing well, housing prices are up, as are corporate profits, although he fails to mention that these have happened with inflation still below the Fed's target rate. So what does he want out of this supposedly needed new financial crisis?

One is that we should have done something about banks being too big to fail. I actually agree with him on this one. However, he fails to note that part of how we got out of the last financial crisis without more bank failures than we had was by letting our very biggest banks buy up several of the smaller ones that were on the verge of failing. What was his alternative? I do not remember what he recommended at the time, but the main alternatives were either letting those banks go bust and paying off the depositers (which quite likely would have bankrupted the FDIC and thrown the expense on the taxpayers) or some sort of temporary nationalization such as the Swedes did in the 1990s. Maybe one of those would have been better, and maybe we should have put in place some mechanism to break up the biggest banks so that some of their gobbled up subsidiaries can go back to failing, but it is not at all obvious to me that having another financial crisis is worth achieving any of these.

Oh, and he is all upset that the budget deficit is going down and so fast! He warns that some of the revenue boosts are temporary, and of course down the road we shall face those inevitably higher interest rates on the national debt, the usual boogey-man. But then, of course, he gets to the standard whine of the VSPs, we did not cut Social Security, Medicare, or Medicaid! What a waste of a financial crisis! Tank the markets and send the unemployment rate back above 10% so that we learn the error of our ways and definitely cut those future benefits now so that we won't have to worry in the future about how they might be cut in the future! Ultra gag.

OK, OK. I must admit that in the end he really does not mean it. In his final paragraph he tells us, "I don't want to see a crisis, and I hope our alleged leaders, who aren't stupid, bestir themselves before one strikes. But I sure wouldn't count on it. Too bad for them. Too bad for us." However, if what he thinks they need to do is to cut the social safety net to shreds, then let us just sit quivering in fear of the crisis that he forecasts we face if we fail to follow his humble advice.

Barkley Rosser

Lafferism as Part of the New Jersey Gubernatorial Race

2013-05-24T06:58:00.000-04:00

New Yorkers may be looking forward to spending this holiday weekend at the reopened Jersey shore and Governor Christie is certainly patting himself on the back for this. There is also a battle of whether his tenure as governor has led to some magical supply side miracle. His own ads paint a picture of how a reversal of Corzine’s alleged tax& tax and spend&spend has led to a New Jersey miracle. His ads makes four claims: (1) employment has soared: (2) everyone got tax cuts; (3) spending may have been cut and still is at record levels (for at least education spending) at the same time: and (4) he has balanced the budget. Of course, this is a replay of Reagan’s 1984 campaign known as “Morning in America”. That one can claim spending is both up and down at the same time is something one would only imagine that Lawrence Kudlow might do. But let’s start with his claim that he has balanced the budget. Mark Magyar challenges Christie’s budget games thusly:

Governor banks on one-shots, property-tax rebate delay, Medicaid savings, and Internet gaming to bridge budget gap

Barbara Buono has also fired back noting that some New Jersey residents are paying more in taxes because of this property tax rebate delay. Bloomberg adds:

New Jersey’s public pension deficit swelled 13 percent to $47.2 billion in fiscal 2012 as the state continued to make partial contributions to its retirement plans. The system had about 64.5 percent of assets needed to cover promises to current and future retirees as of July 1, 2012, compared with 67.5 percent a year earlier, when the gap stood at $41.7 billion, according to data posted on the state Treasury Department’s website.

In other words, the state government is supposed to be making larger contributions to the public pension funds than Christie in counting in his allegedly balanced budgets. To claim that he has balanced the budget is simply put – accounting fraud. Buono is also challenging Christie’s claim as to some alleged employment miracle but noting that the state’s unemployment rate remains very high. If one looks at the Bureau of Labor Statistics reporting for New Jersey’s employment situation, this matter becomes much clearer. New Jersey’s employment situation over the past 20 years has basically mirrored the nation’s. During Clinton’s 8 years, state employment rose by 437,658 and its unemployment rate was quite modest at the end of this period. Since January 2001, the net increase in employment has been a mere 78,600. Our graph shows both employment and labor force since January 2001. Employment basically flat lined during Bush43’s first term but rose to almost 4.3 million by the end of 2007. Then the Great Recession hit and New Jersey’s employment plummeted to around 4.1 million by the end of 2009. Now it is true that employment has partially recovered since then but also note that the labor force has also been growing over the same period. New Jersey’s employment situation is still dismal even if the current governor wants to claim he has been some alleged Laffer style miracle.

How The National Security State Bites Itself In The Behind

2013-05-21T21:14:00.001-04:00

I am not a fan of the Patriot Act or the aggressive actions by President Obama to bust leakers and spy on the US population, and so forth. This extends to the recent "scandal" over the Department of Justice seizure of phone records of Associated Press reporters, the only one of the current three scandals that I think may merit this label. Nevertheless, a pushback is coming from certain parties that while the DOJ's move appears to have been for political revenge that the AP released its story prior to the administration publicly releasing it, even if the release came after national security issues were resolved, that in fact the underlying situation that the story dealt with was indeed a very serious national security matter that ended up getting botched by the release of the story.

Probably the most serious presentation of how this particular situation turned into a totally screwed up mess is by Walter Pincus in today's Washington Post, Pincus being arguably the dean of military-intelligence reporters in Washington, whose credibility was reinforced by his standing against the MSM's rush to support the Bush rush to war before the US went into Iraq. In any case, I have little doubt that his presentation is accurate, and way too complicated and subtle for any of the main parties currently shouting about "scandal" right now to be able to process or figure out substantially, although to me, and probably against Pincus, who seems to be sympathetic to the government trying to crack down on leaks in at least this case, these kinds of messes are what one gets in an overly vigorous National Security State such as the US seems to have become.

The underlying situation does appear to be something much more serious than the usual tripe, and one upshot of the mess has been to damage cooperation between US, British, and Saudi intelligence regarding fighting against genuine terrorist plotting. So, al-Qaeda in the Arabian Peninsula (AQAP) has long plotted to make bomb attacks against the US, including against airplanes and in the US itself. Saudi intelligence managed to get a double agent into the AQAP in Yemen who volunteered to be a suicide bomber on a plane and obtained a bomb to take out a commercial plane. He then managed to get this to US intel, with it ending up in a US lab for inspection. The AP story that came out was that US intel had foiled a plot to bomb an airplane, including that the bomb was in US hands, although leaving out all the details about the Saudi double agent, with AP holding off on the story until various immediate national security concerns were supposedly taken care of.

There were two problemswith this, however. One was that this was during the presidential campaign, and also that the CIA had planted a story that was publicized by White House Press Chief, Jay Carney, a week before the AP story to the effect that al Qaeda was under control and not a threat to Americans. This was actually to fool the AQAP, although it was generally intepreted as being a campaign claim regarding Obama's foreign policy prowess in dealing with terrorists.

So, when the AP story came out it appeared that rather than being a triumph of US anti-terrorism policy, it was interpreted as undercutting this political claim by Obama, and showed that Obama was lying about what was going on for political gain, a mini-scandal of the campaign. In order to minimize this political damage, the administration then proceeded to let out further information regarding the whole situation, particularly some of the details regarding the Saudi double agent and the cooperation with the British and the Saudis. The upshot of this was to shut down that whole operation and reportedly to damage this cooperation.

So it goes, as the old saying says, what a tangled web we weave, when first we seek to deceive.

Barkley Rosser

Oklahoma Relief Funding: Would Robert Barro Agree with Senator Coburn?

2013-05-21T10:18:00.000-04:00

TalkingPointsMemo notes that while Oklahoma Senator Tom Coburn welcomes FEMA relief for the destruction caused by yesterday’s tornado:

Oklahoma Republican Sen. Tom Coburn will seek to offset federal aid to victims of a massive tornado that blasted through Oklahoma City suburbs on Monday with cuts elsewhere in the budget. "That's always been his position [to offset disaster aid]," a spokesman told the Huffington Post Monday night. "He supported offsets to the bill funding the OKC bombing recovery effort."

Two questions: (1) has Coburn always been so consistent on the issue of offsetting surges in government spending; and (2) is this form of consistency really optimal fiscal policy? On the first – I would submit the answer is no unless Coburn demanded that the cost of the disaster known as the 2003 Iraq War be offset. On the latter – let me turn to a 1989 paper by conservative economist Robert Barro, which was published in the Journal of Economic Perspectives. The paper was entitled The Ricardian Approach to Budget Deficits and is often cited as Barro’s case for optimal tax smoothing. Barro noted that transitional increases in government spending were best handled by temporary deficits with taxes set to cover the present value of government spending over the long-run. In short, temporary increases in government spending should not be currently offset as Senator Coburn suggests. Barro often cites wars as an example of transitional increases in spending albeit wars represents very sizeable changes as compared with the more modest FEMA expenditures for any particular natural disaster. I have to admit, however, that ten years ago a few of us worried that the neocon zest for invading other nations might represent a permanent increase in government spending. And yet Republicans back then did not want to finance their zest for war with tax increases. Go figure! But back to natural disasters such as the Oklahoma tornado or Hurricane Sandy. If these were truly unusual events only temporarily raising government relief spending, I suspect Dr. Barro would disagree with Senator Coburn’s call for offsets. Then again – some have worried that we are in for a new era of more natural disasters. If the expected cost of disaster relief has risen, then the Senator may have a point. But shouldn’t the offset be in the form of higher taxes and not a cut in things like Social Security spending?

Financialization and the Incredible Shrinking Time Horizon

2013-05-19T15:35:00.000-04:00

Reading this excerpt from an interview with UNCTAD economist Heiner Flassbeck posted at Naked Capitalism prompts these thoughts on how financialization has altered the way capitalism functions.

Consider two ways an enterprise can be privately owned and managed. (For simplicity I will talk about two discrete models, but of course there is a continuum between them.) In the first way, which I’ll call institutional, a set of residual claimants are tied to the enterprise: there are substantial exit costs to their ownership, and thus they are forced to accept less diversification of their wealth portfolio than would otherwise be optimal—for them. They could be family members with longstanding ties to the enterprise, perhaps dating from some ancestral founding, top executives whose career paths do not easily extend horizontally to other enterprises, perhaps because of a perception that firm-specific knowledge is critical in executive competence, or investment banks or other intermediaries who hold long-term equity positions. It has to be emphasized that, from a purely risk-weighted wealth maximization point of view, such tied asset positions are unfavorable.

The second way, which can be called financial, takes the form of possession of paper claims on the enterprise tradeable in liquid markets or executive positions also tradeable for comparable positions in other enterprises. Exit costs, in other words, are much lower. This greatly reduces the risk of those in positions of transitory ownership and control: the owners can maintain a diversified and shifting portfolio of equity positions, while the executives can preserve outside employment options that substantially reduce the variability of expected permanent income.

In a world of perfect foresight or unitary ("rational") expectations it could be shown that these two models converge. In the real world of fundamental uncertainty, asymmetric information and conflicting expectations they don’t. Rather, the institutional approach compels owners and managers to extend their time horizons and lower their discount rates when forecasting future performance of the enterprise to which they are tied. The availability of low-cost exit reduces this incentive for comparable parties under the financial approach.

One consequence of a longer-term orientation is an incentive for greater investment, and an important venue for this investment is the enterprise’s workforce. A high-investment personnel strategy is one in which more resources are devoted to cultivating human capital and worker attachment to the firm. The latter is fostered through internal labor markets, rent-sharing and a more favorable, or at least less resistant, attitude toward worker voice. (This also depends, of course, on the production regime; under a technologically regimented regime such as one finds in commodity mass production like apparel, the drive system can coexist with a long-term orientation.) Financialization is linked to inequality and greater precariousness of work because there is little incentive to expend resources in the present to capture the return to investments in the workforce that materialize (uncertainly) well into the future.

There is also a political economic dimension to financialization. Those who are wealthy or hold positions at the top of organizational pyramids have disproportionate influence over public policy everywhere. If personal interests play a central role, directly or indirectly via ideology, in the kinds of policies economic elites favor, one would expect systematic differences between these two varieties of capitalism. Perhaps the most important is that the sort of sectoral jockeying one associates with institutionalized capitalism will give way to policies that are favorable to wealth-holders in general. Such policies will be those that promote capital mobility, reduce effective taxes on financial income, limit inflation or intensify disinflation, and backstop credit market positions. Again, I am not claiming that economic elites necessarily operate from a stance of naked self-interest; in fact, it is more likely that they will base their claims on sophisticated arguments that these things are in the public interest, as developed, for example, by like-minded economists.

So why the wave of financialization? The key, in my opinion, is to recognize that tying one’s fortune to any particular enterprise is always costly. Active entrepreneurs do this because their commitment to the enterprise, during this stage, is irreplaceable: there is simply no option for them to diversify their investments. Beyond this, elites seek diversification if they can get it. One reason institutional capitalism has prevailed in certain times and places is that rules were put in place to require it; labor laws, for instance, have served this function in many countries. Capital market regulations have also sheltered tied investors, in effect subsidizing their commitment to particular enterprises. This suggests that one reason we have seen the shift toward financialization is the dismantling, in most countries, of such rules. (The European Union has been explicit in opposing any national regulation that sheltered tied investors in the name of the single capital market.) Another factor is globalization, which is both a consequence of capital liberalization but also an inducement to it: as geographically dispersed markets with radically different economic opportunities and price structures are integrated, the costs of inhibiting capital mobility go up. At the same time, cultural shifts have taken place which devalue the kinds of commitment on which institutional capitalism depends and even celebrate the wealth of those who time their ship-jumping with exquisite accuracy. In the world we live in today, a radical lack of commitment to any specific enterprise is the default position, at least among those at the top of the hierarchy, and conscious social intervention is required to create countervailing pressures.

Two political observations to conclude:

1. Elites recognize as a fundamental conceptual point that a short-term orientation is dangerous. Of course, the point of financialization is that they dare not point this gun at themselves. Thus they project their concerns onto the public sector: it is government’s short-sightedness in fiscal matters alone that causes financial instability. This is a nice option, enabling them to adopt the posture of one who is wise and thinks in the long run while resisting any proposal that would cause them to forego their own private short-run orientation.

2. It is truly unfortunate that the rise of financialization and its political economic fallout has coincided with the emergence of a drastic problem whose solution depends on governments’ adopting much longer time frames than ever before, climate change.

Is The Decline In US Budget Deficits Merely "Interesting"?

2013-05-18T00:16:00.001-04:00

In yesterday's Washington Post, the execrable Robert J. Samuelson declared, "So the latest deficit numbers, although interesting, settle nothing. They don't provide a road map for long-term budget discipline or resolve the debate over the short-term effects of deficits. They do not provide an excuse for both Congress and the White House to postpone genuine discussion an decisions." And what, pray tell, should those "genuine" discussions and decisions deal with? Well, of course, the fave topics of the Washington Very Serious People (VSPs), cutting Social Security and Medicare for those naughty and undeserving baby boomers.

He makes his disdain for the recent austerian moves by the US government clear in an earlier passage of this pathetically silly column: "Nothing of consequence has changed. A few numbers have shifted slightly. That's all." Really? So, shall we play (Bill) Clintonian games over the defintions of "consequence" and "slightly"? I mean we are talking about a budget deficit that is now more than a quarter less than it appeared to be just a few months ago. "Slightly," of no "consequence." Really?

Not that good old RJS is completely out of it. He recognizes that major austerian moves have been made recently in the US on both the spending and taxation side, however stupid and ignorantly put in place. So, the major spending cut has been the Sequestration, something that was never supposed to happen, a cooked-up nightmare that was supposed to scare the two US parties into negotiating the "Grand Bargain," much loved by DC VSPs, that would really take an ax to those "entitlements" for some sort of figleaf tax increase, but in the end failed to overcome the deep partisan divides in the nation, with, in the end, the GOP embracing this massive stupidity as their own.

As it has been, the GB has happened, if not in the way the VSPs would approve, a New Year's tax increase in the form of letting the Bush tax cuts for high income people expire, along with letting those for middle and lower income fica tax payers also expire, along with the blunt and stupid Sequestration. Curiously, while these appear to have reduced US GDP growth by at least as much as 1/2%, all the media noise has been about the increase in taxes for the rich, even as most economists observe that the bigger hit to GDP growth is coming from the fica increase. In any case, the combo of these spending cuts, however mindless, and tax increases, have, along with continued US GDP growth led to these "interesting" budget deficit decreases.

Anyway, RJS and his VSP pals are really annoyed by all this. RJS sneers at economists who supposedly are upset about this deficit reduction. But in fact nearly none of them are bothered at all by the deficit reduction; they are upset at the growth-slowing policies that led to it, which RJS actually recognizes without realizing how this fine point distinction undermines his position, and, of course, he has been loudly calling for such austerian policies repeatedly, particularly if they include cuts in Social Security and Medicare in line with the VSP consensus.

Needless to say, as usual, RJS fails to mention the reduced rate of increase in medical care costs, the main source of the scary scenarios that keep the VSPs up at night. As it is, he views the slight improvements this year as part of some sort of random walk process ready to be offset next year: "They moved in a favorable direction. Next time, they might go the other way." Sure, Robert. Bet on it.

Barkley Rosser

The Odd Coupling: Asking the Wrong Questions about "Decoupling" Environmental Impacts from Economic Growth

2013-05-17T18:43:00.000-04:00

(Cross posted from the Economics and the Common Conference communication platform.)

The great green panacea for salvaging the market/state economic growth model from its own environmental consequences is that it may somehow be possible to "decouple" GDP growth from resource consumption. The rationale for decoupling GDP is summarized in the 2011 United Nations Environmental Programme report, Decoupling Natural Resource Use and Environmental Impacts from Economic Growth:

Decoupling at its simplest is reducing the amount of resources such as water or fossil fuels used to produce economic growth and delinking economic development from environmental deterioration. For it is clear in a world of nearly seven billion people, climbing to around nine billion in 40 years' time that growth is needed to lift people out of poverty and to generate employment for the soon to be two billion people either unemployed or underemployed.

Critics of economic growth have pointed out that even though relative decoupling of resource use from GDP has always been characteristic of industrial society, absolute decoupling – in which the amount of resource consumed actually decreases, even as the market economy continues to grow – has never happened. The Sustainable Development Commission's report, Prosperity Without Growth, for example, explained that greater efficiency in resource use also saves money and that money gets spent on even more goods and services resulting in a rebound effect, also known as the Jevons Paradox. "In short, relative decoupling sometimes has the perverse potential to decrease the chances of absolute decoupling."

But asking whether relative decoupling of GDP from resource consumption can eventually result in absolute decoupling is asking the wrong question. As the decoupling.report clearly indicated, GDP growth is not advocated as an end per se but as a means of generating employment.

Although GDP growth and employment are indeed highly correlated, the growth rate of GDP among the industrially developed countries (OECD) between 1991 and 2009 was about three times as fast as the growth rate of employment. To put this in perspective, energy consumption in the OECD countries increased over the last two decades at roughly the same pace as employment. In other words there has been virtually no relative decoupling of energy consumption and employment in the wealthier countries.

Globally the situation is even worse. From 1991 to 2009 world GDP increased by 93 percent. Employment increased by 33 percent and energy consumption increased by 36 percent. So even though energy consumption per dollar of GDP fell by nearly 30 percent over that period, energy consumption per employed person increased by two and a half percent. If the purpose of GDP growth is job creation, it makes absolutely no sense to talk about the energy intensity of GDP while ignoring the energy intensity of jobs.

As Thomas Pynchon wrote in Gravity's Rainbow, "If they can get you asking the wrong questions, they don't have to worry about answers." What happens when we start asking the right questions? "When we try to pick out anything by itself," John Muir wrote in My First Summer in the Sierra, "we find it hitched to everything else in the Universe." Industrial jobs are hitched to energy consumption which is hitched to GHG emissions. The right question, then, is how can we unhitch human flourishing from natural resource consumption and environmental impacts?

Giacomo D'Alisa and Claudio Cattaneo ask the right questions in their research on "Household work and energy consumption: a degrowth perspective." Their research reveals the dangers, in terms of energy consumption, of promoting so-called "economic growth" through the substitution of commodity-based economic activity for household-based production.

The Buen Vivir movement that originated with the indigenous people of the Andes asks the right questions. Barbara Unmüßig, Wolfgang Sachs and Thomas Fatheuer summarize that movement's core principles in their Critique of the Green Economy:

Firstly, the good life is contrasted with development, which is seen as unilinear and imposed from above. According to this view, development is a mental process as well as a socioeconomic one. The aim is nothing less than a decolonization of the imagination.

Secondly, there are different narratives of Buen Vivir in different cultural traditions. Indeed, there are different nations – the Bolivian constitution describes the country as plurinational – each with their own language, history, social forms and ways of adapting to natural conditions. Biological diversity begets cultural diversity and vice versa.

Thirdly, it is a community-based narrative that emphasizes relationships with one’s fellow humans, the plant and animal world and the cosmos instead of starting with the individual as the Western tradition does. Buen Vivir means living well with the surrounding world, which includes both the natural environment and other people.

Fourthly, the forests, land and seed are to be tended jointly; collective work and machines are also common property. Social rules and methods can change, but in ways that the community decides.

Fifthly and finally, nature is the basis of humans’ existence and they are part of the community of all living beings. Mountains and rivers, plants and animals are included in the common narrative as living subjects with whom one can converse.

The Texas Environmental Law Center and Our Children’s Trust asked the right question when they brought suit to have the atmosphere declared a public trust. As David Morris reported in On the Commons, Peter Barnes proposed treating the sky as a public trust in his 2001 book, Who Owns the Sky. Barnes's idea was the basis for a "cap-and-dividend" bill proposed in the U.S. House of Representatives in 2009. In July 2012, Judge Gisela Triana, of the Travis County, Texas, District Court ruled in favor of the plaintiffs.

In The Moon Belongs to Everyone, I traced the way that "everything is hitched to everything else" back from greenhouse gas emission to hours of industrial employment and proposed that the most direct way to cap emissions would be to cap hours of paid work. My policy proposal may not be the final answer but I think I'm asking the right questions.

Is the Stock Market Undervalued?

2013-05-17T18:03:00.000-04:00

Gillian Tett sees a soaring stock market and frets that we are experienced a bubble. Antonio Fatas and Paul Krugman calmly remind us of the fundamentals. Paul notes that the stock price rally tracks earnings growth which implies we have not seen much in the way of an increase in the price to earnings ratio whereas Antonio notes:

interest rates are low because of a trend that started in the mid 2000s of increased saving in some emerging markets and the effects of the great recession that increased saving in advanced economies and made investment collapse. When no one wants to invest or consume, interest rates are low. And they are unusually low this time because the patterns of investment and saving are driven by a crisis that is very large compared to historical patterns. As a reminder, interest rates are low everywhere not just in countries where quantitative easing is taking place

Wait – with lower interest rates, the question should be why hasn’t the price to earnings ratio increased? In other words, with higher earnings and lower interest rates, shouldn’t stock prices be even higher?

Wild Things: Question Mark and the Austerians

2013-05-16T16:09:00.000-04:00

At his blog today, Paul Krugman cited Michael Kalecki's 1943 essay, "Political Aspects of Full Employment":

Two and a half years ago Mike Konczal reminded us of a classic 1943 (!) essay by Michal Kalecki, who suggested that business interests hate Keynesian economics because they fear that it might work — and in so doing mean that politicians would no longer have to abase themselves before businessmen in the name of preserving confidence.

Sandwichman serialized Kalecki's essay on EconoSpeak in 14 installments four years ago. Strategically, it makes a difference whether your analysis comes before or after the damage has been done. Hindsight is no substitute for foresight.

There's something Krugman didn't mention today about Kalecki's essay. In it, Kalecki also singled out an important exception to the businessmen's fear of full employment: spending on armaments. See also: Krugman of Mass Destruction, October 30, 2011 and Krugman, Ike, Keyserling, Keynes and Kalecki: "Siphoning Off a Part of the Annual Increment of GNP," October 31, 2011.

I wonder, though, whether Kalecki went too far or spoke too subtly when he observed that "obstinate ignorance is usually a manifestation of underlying political motives." That might indeed be true when we include as "political" the rather mundane motivation of fitting in with one's colleagues. But I suspect it is misleading if we take "political motives" to refer to some larger purpose. Thus the controversy between the self-proclaimed Keynesians, like Krugman, and the austerians may be a bit of a phony war.

The choice is not between politically-motivated "bad" economics and technocratic "good" economics. The latter is a posture that only leads to what C. Wright Mills called "crackpot realism" -- a sort of Faustian bargain that settles for half the treasure in return for the whole soul on the assumption Old Scatch will be so pleased he gets to keep half the treasure he'll forget about collecting. The Sandwichman has a namesake's affinity for the story of the Faustian bargain.

Working Conditions in Bangladesh

2013-05-13T19:08:00.005-04:00

AP reports on some limited good news:

Bangladesh’s government agreed Monday to allow the country’s garment workers to form trade unions without prior permission from factory owners, the latest response to a building collapse that killed more than 1,100 people and focused global attention on the industry’s hazardous conditions. The Cabinet decision came a day after the government announced a plan to raise the minimum wage for garment workers, who are paid some of the lowest wages in the world to sew clothing bound for global retailers.

It is a shame that almost 1000 workers had to die from unsafe working conditions before the government decided to cease its anti-union efforts. The reason this is only limited good news is explained later:

Bangladesh is the third-biggest exporter of clothes in the world, after China and Italy. There are 5,000 factories in the country and 3.6 million garment workers. But working conditions in the $20 billion industry are grim, a result of government corruption, desperation for jobs, and industry indifference. Minimum wages for garment workers were last raised by 80 percent to 3,000 takas ($38) a month in 2010 following protests by workers. Since 2005, at least 1,800 garment workers have been killed in factory fires and building collapses in Bangladesh, according to research by the advocacy group International Labor Rights Forum.

Free trade certainly brought benefits to U.S. consumers of apparel in the form of lower prices. We had heard from proponents of free trade that it also brought benefits to Chinese workers in the form of higher wages. But the apparel multinationals saw places like Bangladesh as an opportunity to keep its profits high even as consumers enjoyed lower prices. Cost minimization is not always welfare increasing.

More Benghazi Myths

2013-05-13T01:32:00.001-04:00

I have previously posted on this topic, http://econospeak.blogspot.com/2013/01/benghazi-myths.html , which drew heavily on posts from Juan Cole, noting that many things widely believed by the public and incessantly repeated by much of the media, not just Fox News, is wrong. The new hearings on this matter have continued to reinforce publicity about these myths, along with introducing some new elements from testimony, with much of the media taking these items seriously, particularly the testimony by late Ambassador Stevens's right hand man in Tripoli, Gregory Hicks. One would expect him to be serious, and his testimony had drama, particularly about his final phone conversation with Stevens, but unfortunately it also contained some seriously questionable claims, which may have been responsible for him not being treated well by his superiors, but which may yet get him a hefty book contract or a regular and paid speaking gig on Fox News.

Let me begin by cutting to the chase of the hearings and reiterating the main point from my last post: What is claimed to be lies are not. So, much of this new hearing focuses on the ongoing changes of wording in talking points last fall that went on, apparently due to arguments between the State Department and CIA. The hearings push the view that all this was part of an attempted coverup of the fact that those attacking the facilities in Benghazi were terrorists, rather than extremists, and in particular that their attack was not motivated by the anti-Muhammed video. Supposedly key to this is that they did not come out of the ongoing street demonstrations in Benghazi against the video that were being kept back from the consulate by local authorities, this latter apparently correct.

However, CIA has indicated the leaders of Ansar-el-Islam (or el-Sharia) had watched the demonstrations in Cairo against the video at the US Embassy on TV prior to the attack. No one will ever know whether or not the attack had been long planned, but the video does seem to have provided at least some motivation. There is and was no contradiction between it being a terrorist attack and being motivated by the video. It was a terrorist attack motivated by the video. For support of this position, see http://articles.washingtonpost.com/2012-10-19/opinions/35501083_1_cairo_benghazi_safe_room , keeping in mind that David Ignatius is a reporter/columnist with some of the best CIA connections in the business. It remains an uncriticized assumption by nearly all in the hearing and the media that being a terrorist attack and being motivated by the video cannot possibly coexist.

So we come to the ultimately pathetic testimony by Hicks. His strongest and most egregious claims involve his own half-baked efforts to get military help to those in Benghazi. Let me say that I fully sympathize that he was upset after hearing his friend and superior on the phone under attack. He wanted to help and called for the scrambling of jets and for a group of 4 Special Forces personnel to be sent to Benghazi to help. We have repeatedly heard how one military guy praised him for his "balls" on this latter plea. However, this all turns out to be a bunch of baloney. The jets could not have gotten there in time to do anything useful, and the 4 Special Forces people in Tripoli were there on a fact finding mission and were armed with only handguns. They could have done nothing, and that was why they were not sent. While Hicks is not outright lying, he is engaging in some sort of shameless and ultimately nauseating self-aggrandizing grandstanding. For more on this see, http://littlegreenfootballs.com/article/41968_Why_Did_the_Military_Tell_special_ForcesTeam_Not_to_Fly_to_Benghazi_(For_Good_Reasons) .

Which brings us to a greater hypocrisy and bottom line on these hearings, that due to its classified nature, nobody is going to say boo about what the CIA was doing there or what Ambassador Stevens was doing in Benghazi at that time, given how it was well known that the place was not well secured with these various terrorist groups lurking about and making random attacks. Hicks made much of how requests for more security were turned down, but those requests were for more security at the embassy in Tripoli, not in Benghazi. The "consulate" in Benghazi was a front for the real operation there, which was the supposedly hidden CIA Annex, which had been established prior to the main building and always had more people in it. Very likely Stevens was there to deal with problems in the CIA operations, given that basically nothing was going on in the consulate. What is unclear is if the Ansar people knew he was there or not. In any case, it remains officially unknown what was going on there, although a few reports claim (with some denials of this from some quarters) that the Annex had been trying to run guns to Syrian rebels, but that a major snafu had happened involving the Turks over which faction in Syria to give them to, and that was what had brought Stevens to Benghazi after a short visit to Turkey just before then. Needless to say, the current hearings are not going to come close to even mentioning any of this. See http://www.globalresearch.ca/the-benghazi-affair-uncovering-the-mystery-of-the-benghazi-cia-annex/5320872 .

Barkley Rosser

What the “Low Hispanic IQ” Dissertation Tells Us About Dissertations in General

2013-05-13T00:10:00.002-04:00

Dissertation scandal! Jason Richwine was disowned by the Heritage Foundation when it was revealed that his PhD dissertation at the Kennedy School of Government (Harvard), entitled “IQ and Immigration Policy”, argued for the superior intelligence of some immigrant “races” and the inferiority of others. At the bottom of the heap were Hispanics, about whom Richwine concluded, “No one knows whether Hispanics will ever reach IQ parity with whites, but the prediction that new Hispanic immigrants will have low-IQ children and grandchildren is difficult to argue against.”

Of course, the interesting question is not, why did Heritage pick this guy in the first place, but, what was his dissertation committee thinking? According to Jon Wiener over at The Nation, his chair was George Borjas, and the other readers were Richard Zeckhauser and Christopher Jencks. Borjas is politically conservative, but he has done as much as anyone to set the agenda of immigration studies in the US during recent decades. Zeckhauser is perhaps the foremost name in pubic finance. Jencks is a specialist in inequality, generally associated with the center-left.

The one who is primarily responsible for approving Richwine is Borjas. Nothing in Borjas’ past work suggests that he has a penchant for theories about racial inferiority. In fact, most dissertation chairs in economics buzz through the window dressing in the drafts that get sent to them and zero in on the methodology. Did the candidate select and implement the right estimators, properly observe sampling issues, cite the appropriate papers? You can’t let someone get through if there are observable errors. The rest you skim.

With other readers it is rather hit or miss. Senior faculty at large research universities may end up on many such committees. They meet with the candidate once or twice and have little personal investment. No one would blame them if they did the bare minimum, or less. My guess is that both Zeckhauser and Jencks are rather embarrassed at the moment, but it will pass because everyone know’s it’s not really their fault. More to the point, will Borjas suffer any consequences? This is entirely speculative, but I would wager that he will cruise past this too. Everyone knows a dissertation chair can’t vet the whole thing.

I’d be interested in hearing from readers if this matches their own observations about the dissertation process.

Peer Review: Economists and the Rhetoric of Groveling

2013-05-12T21:13:00.001-04:00

"As a general rule economists are not very good at economics." -- Dean Baker

As a general rule economists are not very good at accountability. The rules of evidence in Anglo-American common law disallow the raising of allegations without a basis in provable fact. The rules of evidence in Anglo-American economics... well, there are no rules of evidence.

It's hard to think of another field (besides advertising) where assertion trumps analysis with such impunity. Perhaps "impunity" is too mild a word, though. Come to think of it, there seems to be a smug self-satisfaction in economists' lack of accountability -- as if being "above" accountability was itself a badge of distinction. Let's follow that intuition...

The expression "peer review" in the title doesn't refer to the niceties of academic publishing. The peers I have in mind are the nobility of 18th century England who, according to Fitzmaurice, seldom had the kind of formal, grammar school education that the sons of clergymen and gentry whom they might patronize did.

So what, pray tell, might these 18th century noble peers and their clients have to do with either the competence or accountability of 21st century economists? In a word, "mannerisms."

To elaborate my hypothesis, I would first like to return to Fitzmaurice and her observations on the rhetoric of late modern English letters (1654-1762):

...the Montagu manuscript collection reflects two fairly distinct groups of letter-writers — namely Montagu’s clients on the one hand and his peers on the other. … [Members of the former group] exhibit acute awareness of and adherence to conventional strategies of linguistic politeness that index the superior rank and greater power of their addressee. So in addition to formal physical indicators of respect such as opening and closing formulae, the rhetorical structures adopted by the men seeking patronage indicate the extent to which epistolary mendicity is conventionalized in humiliative discourse at the time.

Personally, for quite some time I have taken a kind of perverse delight in the subtle, stilted ambivalence of the closing salutation, "I beg to remain, Sir, your most humble and most obedient servant." George Bernard Shaw captured something of this potential for duplicity in his critique of the dramatist, Dion Boucicault's "Stage Irishman":

His vices are the arts by which he accommodates himself to his slavery – the flattery on his lips which hides the curse in his heart; his pleasant readiness to settle disputes by "leaving it all to your honor," in order to make something out of your generosity in addition to exacting the utmost of his legal due from you; his instinctive perception that by pleasing you he can make you serve him; his mendacity and mendicity; his love of a stolen advantage; the superstitious fear of his priest and his Church which does not prevent him from trying to cheat both in the temporal transactions between them; and the parasitism which makes him, in domestic service, that occasionally convenient but on the whole demoralizing human barnacle, the irremovable old retainer of the family.

Dear Officer Krupke! "I'm depraved because I'm deprived!" Or, I'm mendacious because I'm mendicious! In addition to the potential insincerity of the formulaic hyper-humility is what I will call the equilibrium of deference and disdain. That is to say that the necessity of groveling to a social superior might well evoke in the groveler a compulsion to snarl at a social subordinate.

What I'm suggesting, then, is that mannerisms of genuflection and contempt are embedded in post-enlightenment academic discourse -- and particularly in economics -- to a degree that trumps analysis. Perhaps it is not so much that, as a general rule, economists are not good at economics as that the economists who generally rule do so not because they are good at economics but because they have perfected the ritual elements of deference toward those above them and disdain toward those below.

Need I point out that this is worse than feudalism? It is a subaltern feudalism that replaces noblesse oblige with faux aristocratic disdain affected by a self-appointed mendicantocracy.

If we be serfs, let us at least be serfs to Lords and not serfs to the supplicants of Lords!

I beg to remain, Sir or Madam, your most humble and most obedient and most servile servant,

Sandwichman

Bank Capital Regulation, the Modigliani-Miller Theorem, and the Winstar Litigations

2013-05-12T04:30:00.002-04:00

Olivier Blanchard’s Rethinking Macroeconomic Policy notes the following under Finanical Regulation:

I am struck by the level of uncertainty and disagreement about the effects of capital ratios on funding costs, and thus on lending. Reasonable people, such as Martin Hellwig and Anat Admati, argue that we are not so far from the Modigliani-Miller world, and banks can afford substantially higher capital ratios. Others, and not only bankers, argue that such ratios would instead destroy the banking industry.

This reference to Modigliani-Miller intrigued me because of certain discussions of the Winstar litigations, which we’ll note below. Martin Hellwig and Anat Admati co-authored with Peter M. DeMarzo and Paul Pfleiderer Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive. While I highly recommend that you should read the entire paper, let me provide the references to the Modigliani-Miller theorem:

One of the fundamental results of corporate finance (Modigliani and Miller, 1958) states that, absent additional considerations such as those involving tax advantages or public subsidies to debt, increases in amount of financing done through equity simply re-distributes the total risk that must be borne by investors in the bank, i.e., the holders of debt and equity and any other securities that the bank may issue. The total risk itself is given by the risks that are inherent in the bank’s asset returns. In a market in which risk is priced correctly, an increase in the amount of equity financing lowers the required return on equity in a way that, absent subsidies to bank debt and other frictions, would leave the total funding costs of the bank the same. The Modigliani-Miller analysis is often dismissed on the grounds that the underlying assumptions are highly restrictive and, moreover, that it does not apply to banks, which get much of their funding in the form of deposits. The essence of this result, however, is that in the absence of frictions and distortions, changes in the way in which any firm funds itself does not change either the investment opportunities or the overall funding costs determined in the market by final investors. The one essential assumption is that investors are able to price securities in accordance with their contribution to portfolio risk, understanding that equity is less risky when a firm has less leverage i.e., funds itself with less debt.

The authors use this result to discredit one of the common arguments made against significantly increasing equity requirements:

Increased equity requirements would increase banks’ funding costs because equity requires a higher return than debt. This argument is fallacious, because the required return on equity, which includes a risk premium, must decline when more equity is used. Any argument or analysis that holds fixed the required return on equity when evaluating changes in equity capital requirements is fundamentally flawed.

So what were the Winstar litigations? United States v. Winstar Corp. was a Supreme Court decision that the Federal government breached certain contractual obligations when the Bush41 administration chose to restore capital adequacy requirements in the aftermath of the savings-and-loan crisis. Winstar cases are still in litigation with enormous purported damages being suggested by the attorneys for the financial institutions such as Winstar. Some of the arguments put forth by these attorneys are akin to what Blanchard dubbed the bankers argument that capital adequacy rules “would instead destroy the banking industry”. The Federal government as defendant in the Winstar litigations hired expert witnesses to argue for lower damages, which seems to be a reasonable proposition given the above discussion of how the Modigliani-Miller Theorem applies to the financial sector. But leave it to the bankers and their attorneys to find any means possible for extracting the rents from either the public and taxpayers – even if they have to hire prostitutes dressed up as expert witnesses.

Lumps of Mulligan and the Specter of the Disembodied "Idea Behind"

2013-05-10T14:36:00.001-04:00

It's nice to see that Casey Mulligan and Paul Krugman agree on something, even if it's only their shared unquestioning credulity toward a 233-year old zombie mind-reading hoax.

Dean Baker calls attention to an Economix blog post at the New York Times in which Mulligan discussed "What Job-Sharing Brings." Mulligan opens his remarks with a classic paraphrase of the lump-of-labor fallacy canard, omitting only the "lump-of-labor fallacy" brand name:

The idea behind work-sharing is that employers have a certain amount of work that needs to be done, and that the work can be divided by many employees working a few hours each or a few employees working many hours each. If hours per employee could be limited, by this logic employers would have to hire more employees to get the same amount of work done.

Let's make this as simple as possible. Professor Mulligan doesn't know what "the idea behind work-sharing is." He has no way of knowing. He presents no evidence of any advocate of work-sharing saying that is the idea behind it. This is a bogus assertion and everything that follows is null and void because when you make up things about what other people supposedly think, it doesn't much matter what reasons you give for showing that they are wrong. If people didn't say those things, you have no reason for supposing they thought them.

Let's make this just a bit a simpler. It's not just that Mulligan is reading minds, he doesn't even specify who's mind he's reading. The argument is that mind reading is hard enough to do when you know what mind you're reading. It's darn near preposterous when you can't even specify the mind. Is that clear?

Jonathan Chait said something in discussing opinion journalism a couple of weeks ago that bears repeating (over and over again):

If you’re arguing against an idea, you need to accurately describe the people who hold them. If at all possible, link to them and quote their argument. This is a discipline that forces opinion writers to prove that they’re debating an idea somebody actually holds.

Fancy that! An idea somebody actually holds! Does anyone actually hold Mulligan's "idea behind" work sharing? Not that Mulligan knows of. But let's not single out poor Mulligan for mindless mind-reading. Here's what his comrade in mind-reading arms, Paul Krugman wrote almost ten years ago:

Economists call it the "lump of labor fallacy." It's the idea that there is a fixed amount of work to be done in the world, so any increase in the amount each worker can produce reduces the number of available jobs. (A famous example: those dire warnings in the 1950's that automation would lead to mass unemployment.) As the derisive name suggests, it's an idea economists view with contempt, yet the fallacy makes a comeback whenever the economy is sluggish.

Notice "the idea"? Now see who had that idea? I didn't think so. This is scarier than zombies, folks! No telling what those disembodied ideas might do when they get a mind to it!

Look, I've refuted this foul piece of dog crap that passes for economic conventional wisdom over and over and I'm sick and tired of repeating myself. The prototype of the disembodied idea is Dorning Rasbotham's unattributed "say they" from his 1780 pamphlet, "Thoughts on the Use of Machines in the Cotton Manufacture":

There is, say they, a certain quantity of labour to be performed. This used to be performed by hands, without machines, or with very little help from them. But if now machines perform a larger share than before, suppose one fourth part, so many hands as are necessary to work that fourth part, will be thrown out of work, or suffer in their wages.The principle itself is false. There is not a precise limited quantity of labour, beyond which there is no demand.

Can you identify who "they" are? No, not even if you go back and read the whole fucking pamphlet. "They" is a figment of Rasbotham's rhetoric. A straw man. Got it? Every word after the word "they" is a lie because there is no "they" there.

But it gets worse, people. I've got a database of around 577 recitations of the lump of labor fallacy claim going back to the 1870s. How many of them do you think cite a particular individual or organization that actually holds "the idea behind work-sharing"? Want to take a guess?

Here are the names of some respected economists who have either refuted the fallacy claim or have presented cogent arguments for the ameliorative potential of work-time reduction on unemployment (or both): John R. Commons, Dorothy W. Douglas, John Maurice Clark, Sir Sydney J. Chapman, A. C. Pigou, Maurice Dobb, John Maynard Keynes, Luigi Pasinetti. How many of those names do you suppose have been cited by the Mulligans and Krugmans when they disparage "the idea behind" work sharing?

Abenomics and Mortgage Rates

2013-05-08T04:39:00.003-04:00

Are the folks at Bloomberg serious:

Bank of Japan Governor Haruhiko Kuroda’s stimulus policies are backfiring in the housing market, where mortgage rates are rising even as the central bank floods the financial system with cash. While 35-year home-loan costs rose one basis point to 1.81 percent this month from an all-time low of 1.8 percent in April, any increase will be undesirable for the BOJ ... The BOJ’s April 4 announcement that it would double bond buying to generate 2 percent inflation unleashed the highest government-debt volatility in a decade and pushed 10-year yields up by 4 1/2 basis points. The benchmark lending rate for large corporations, known as the prime rate, increased five basis points from its record low to 1.2 percent on April 10, despite the BOJ’s aim of stoking the economy through cheaper funding.

Tim Duy has some fun with the fact that Bloomberg makes a big deal out of a one basis point increase in nominal interest rates. Seriously guys. You know – temperatures fell in New York City this week so by your logic – the era of global warming is over. The whole point of Abenomics wasn’t necessarily to lower nominal interest rates but to lower real rates by increasing inflationary expectations. If nominal rates on mortgages are only 1.8% and if inflationary expectations are 2%, then real mortgage rates are negative. Contrast this Japanese rate to the 3.35% rate on U.S. conventional mortgages (as of May 2, 2013) as reported by the Federal Reserve. The fact that nominal rates may have bumped up by a few basis points is not proof that monetary policy is backfiring. Note also that this story admits later that the yen has devalued, which one would think might raise net export demand.

Is The Kyoto Protocol Dead?

2013-05-06T23:15:00.002-04:00

Technically speaking, the Kyoto Protocol died in December, 2012, the endpoint of its official legal standing. Of course, it was supposed to be replaced by a subsequent agreement to have been negotiated in Copenhagen, but that long-prepared conference was a failure, with ultimately the US and China unable to come to a deal, and with those coming out of that disaster putting off for later a new round and agreement, with the current official hopes for there to be one reached in 2015. As these things go, much as with federal budgets, when there is no official successor, the predecessor remains de facto in place, and that has been the case, more or less, for the now officially defunct Kyoto Protocol, put into place to deal with global warming (or "climate change," a term that I find uselessly vague for what is going on).

In any case, one of the main institutions established under the impetus of the Kyoto Protocol was the European carbon market. The front page of the Washington Post today reports that "Europe's carbon market goes bust." From nearly $30 per metric ton in June 2008, the price has now fallen to $3.05 in the European market, with a price of around $10 in the new California carbon market. Given the idea that a new agreement would build off the former one, this collapse of functioning of probably the main institution to come out of Kyoto is very disturbing in terms of developing a coherent successor to Kyoto. The Kyoto Protocol may in fact be seriously dead, or at least moribund.

Various elements have led to this outcome. When the overall cap in terms of aggregate carbon emissions was set, full information on the situation in Europe was not fully known. Many argue that this led to this initial cap being set too high. Since then, the Great Recession hit, with a double dip now in place in place there. With falling output, emissions have fallen as well. From the standpoint of reducing CO2 emissions, this is a good thing, but this reduced demand has pretty much tanked the market. The final blow is that an effort to tighten the cap in the European Parliament was rejected, with such heavily coal burning nations as Poland leading the opposition to any cap tightening.

If this were not bad enough, there is now the likelihood that in the near term the pressure to do something may reduce as it appears that the trend to atmospheric warming may be slowing, http://econospeak.blogspot.com/2013/05/blowing-in-the-wind-is-global-warming-over.html . However, it should be made clear that there has been no slowing of global warming. What is going on is that much of the heating is currently going into oceans at levels deeper than 700 meters. As long as CO2 continues to accumulate in the atmosphere, warming will continue, and at some point the locus of this warming will return to the upper oceans and the atmosphere. But in the meantime, there is a danger that there will be no successor to Kyoto while the remnants of Kyoto break down.

The increase of these problems in the European carbon market has encouraged those who favor a carbon tax as an alternative to cap and trade systems. Figures as diverse as Joseph Stiglitz and Greg Mankiw have long been in the "Pigovian" camp, arguing for the superiority of a carbon tax, particularly now in the time of Grand Bargain budget negotiations, hoping that a door might be open to some sort of tax increase, despite the extreme opposition to any tax increases by Congressional GOPsters, unless of course they are undoing fica tax cuts. I can appreciate that under these circumstances, supporters of a carbon tax see a possible opening.

Frankly, I do not oppose a carbon tax being imposed in the US, even if in Virginia an anti-carbon tax has just been imposed by making hybrid car owners pay an extra fee. What I see are two problems for relying on this as a way to develop a global system of carbon emissions governance to succeed Kyoto. One is that it is very difficult to develop cross-border harmonization of such taxes. The Scandinavian countries attempted this some years ago, passing carbon taxes with a proviso to have cross-border adjustments related to trade, but have been unable to come to an agreement. If the best governed nations in the world, basically friendly towards each other and at equal levels of economic development cannot do it, I find it highly unlikely that an agreement on this will be manageable between the US and China.

The other is the fact that for all its current troubles, there is already a nascent mechanism in place in the form of the troubled European carbon market. While the price is down now, when the European economy finally recovers (notice my breathless optimism here), demand for carbon credits will resume, and indeed it was fear of the price rising too much if the cap is tightened that was a central argument by the Poles and other opponents of tightening the cap in Strasbourg. Particularly in Europe there is much annoyance with how the US has handled this whole issue, with the US pushing carbon markets at Rio and then Kyoto, with the Europeans being the ones supporting taxes. They went along with carbon markets in order to please the US, who then failed to ratify the Kyoto Protocol. Now with prominent US economists pushing the idea of a carbon tax, the attitude in Europe is highly negative, along the lines of "Why should we try to do what you want us to do yet again when you shafted us the last time we did so?" For better or worse, the remnant Kyoto mechanisms probably remain the best chance for any future global agreement on this matter.

A Very Big Puzzle: How Many Ways to Skin Katz?

2013-05-06T02:09:00.000-04:00

DAVID LEONHARDT wrote, in "The Idled Young Americans," NY Times May 3, 2013:

And while the American economy has come back more robustly than some of its global rivals in terms of overall production, the recovery has been strangely light on new jobs, even after Friday’s better-than-expected unemployment report. American companies are doing more with less.

"This still is a very big puzzle," said Lawrence F. Katz, a Harvard professor who was chief economist at the Labor Department during the Clinton administration. He called the severe downturn in jobs "the million-dollar question" for the economy.

I do not like thee, Doctor Katz. The reason why... well, actually, in 1998 Katz wrote a commentary to an article by Jennifer Hunt that contained one-half of one of the most duplicitous arguments I have seen in my life (it offers a clue to why a jobless recovery is a "very big puzzle" to Katz): "if hourly wages rise and labor is viewed as more inflexible, such policies could induce capital substitution for labor."

What's wrong with that? That's only half the argument; the other half, delivered in a 2011 white paper co-authored with David Autor: "Technological improvements create new products and services, shifting workers from older to newer activities. Higher productivity raises incomes, increasing demand for labor throughout the economy."

It helps to understand that "technological improvement" is a euphemism for "capital substitution for labor." They're both hollow platitudes but with contrary spin. Use the former phrase when you want everyone to think everything will work out just fine and dandy (in the long run). Use the latter phrase when you want to warn against unwise policies that might -- shudder! -- lead to higher hourly wages.

It's a perfect heads I win, tails you lose trifecta! And how do I know that "technological improvement" and "capital substitution for labor" are two sides of the same coin for Katz? Simple. They both proceed from "lump of ___ fallacy" claims:

Many individuals believe that cuts in the work week (that is, reductions in working hours per worker) can reduce unemployment. In what has been labeled the lump of output fallacy, most advocates of work-sharing implicitly assume that output is held constant in response to a policy effort to reduce hours per worker, so that total hours of work to be done each week are unchanged... (1998 -- "capital substitution for labor")

This ‘lump of labor fallacy’—positing that there is a fixed amount of work to be done so that increased labor productivity reduces employment —is intuitively appealing and demonstrably false. (2011 -- "technological improvement")

If anyone wants to track down these citations and verify my interpretation, you're welcome to do so. I won't bother a point-by-point explication because I've learned that trying to explain gibberish just confuses people. There's nothing to explain. It's self-contradictory gibberish.

Anyway, according to the impeccable Katz logic, there is no need for higher hourly wages because "higher productivity raises incomes" (presumably without any capital substitution-inducing demands for higher hourly wages from workers).

Or perhaps those raises in income come from working more hours with no rise in hourly wages? As Professor Katz has shown, there is more than one way to skin a worker. Workers may want to know that there is more than one way to skin a Katz:

It is a fallacy to suppose that Katz are skinned alive. In the first place, to skin a Katz when alive would be utterly impossible; and, secondly, it does not make any difference in the quality of the skin. The origin of the fallacy is probably that a Katz is easier skinned immediately after death than if allowed to become rigid. It is very remarkable how fashions set by English ladies influence wild and tame animals even in the most distant parts of the world. I am very glad the ladies have made Katz fashionable, as at last some use is found for these animals, which, being untaxed, are so abundant that any night, and in any weather, Katz—many of them half-starved—swarm in the London streets, and the poorer the neighbourhood the more abundant are the Katz.

Blowing In The Wind: Is Global Warming Over?

2013-05-04T17:47:00.000-04:00

There has recently been much huffing and puffing about an apparent slowdown in the rate of global warming, with a recent article in The Economist on the matter getting lots of attention, http://www.economist.com/news/science-and-technology/21574461-climate-may-be-heating-up-less-response-greenhouse-gas-emissions . The supposed "reduced climate sensitivity" (to CO2 concentration changes) has gotten all the usual suspects very excited, from longtime more or less respectable scientific "skeptics" (most of whom accept that there is warming but just say it is not as great as most others say) through literate innumerates such as George Will who recently asserted that there had not been a year warmer than 1998 since then (2010 was and is currently the record-holder), on through to the completely irresponsible political hacks ranting about hoaxes such as Sen. Inhofe (Lunatic-OK) and Virginia AG Ken Cuccinelli, now running for Governor of my state, who sued the University of Virginia to get ahold of the emails of climatologist Michael Mann where surely he would find the smoking gun to show the hoaxing conspiracy (!!!). In any case, there does appear to have been some slowing of the rate of increase in average global temperature in the last few years, with this spring being the coldest in the US since 1975 punctuating the point, even though "weather is not climate." So, what is up?

According to recent research by Balmaseda et al appearing in Geophysical Research Letters and some other outlets, as linked to at Real Climate, http://www.realclimate.org/index.php/archives/2013/04/the-answer-is-blowing-in-the-wind-the-warming-went-into-the-deep-end/ , indeed the answer is blowing in ocean winds that have reduced the warming effect in the atmosphere in the near term. However, while the air may not have gotten as much warmer as the main models predicted, the planet is still warming. The main recent locus of this warming has been in the ocean at depths greater than 700 meters, "the deep end." This fulfills a warning made by many that indeed the global climate is very hard to model, with lots of nonlinear dynamics and complexities and sub-parts that react and interact with all kinds of thresholds. A piece of this is that at some point down the road the warming will again move towards the surface and back into the atmosphere, so we could get a rather sharp and sudden increase down the road at some point (and also El Nino and some other such phenomena are playing roles). I have a few further observations.

One is to anyone who wants to argue that the claim that global warming may have slowed down (or possibly even reversed slightly) cannot be right because the glaciers are still retreating and the Arctic ice sheet reached an all time minimum in late 2012. I note that once the average global temperature gets above a certain point, the glaciers can retreat and the Arctic ice can continue to shrink at a constant level of temperature without any further increases happening. So, these real phenomena do not prove that the average global temperature is continuing to increase.

Also, there is the fact that there are substantial regional variations in temperature trends. This was used by some skeptics to argue against global warming some years ago when it was noted that certain parts of the globe were indeed cooling. However, in connection with the last paragraph, the part of the world that has seen the most warming all along has been the Arctic zone, something I had forecast to me decades ago by Patrick Michaels, a prominent warming skeptic (although one of those who says that warming is happening). So, it could well be that there continues to be a rising temperature in the Arctic zone, even if the global average were to be falling slightly, or at least constant.

A more general point is one that many people are unaware of, that the probability distribution of likely outcomes is almost certainly highly kurtotic, quite likely a Paretian power law, with fat tails, and very unlikely to be Gaussian normal. As it is most of the IPCC reports have plugged in assumptions of the latter, but Martin Weitzman has in several places argued that the power law outcome is much likelier, with the ubiquity of nonlinear positive feedback effects of various sorts in the system responsible for this (albedo, methane in Siberia, etc.). This means that the probability both of a seriously catastrophic increase in temperature and also of a reversal and decline in temperature are much higher if Weitzmann is right and the IPCC is wrong. By his calculation, if the distribution is Paretian power law, the probability of a seriously catastrophic 12 degrees C temperature increase could be as high as 1% ("Fat-Tailed Uncertainty in the Economics of Climate Change," Review of Environmental Economics and Policy, 2011, vol. 5, pp. 275-292).

Regarding the possibility of a temporary stallout or reversal of global temperature, it should be kept in mind that between about 1940 and 1975 global average temperature in fact declined somewhat, even as CO2 concentrations were mounting. It remains both unmodeled and unclear why that happened, and indeed in the early 1970s there were more climatologists than is now admitted who were forecasting either a new ice age or at least an unclear outcome between warming and cooling tendencies (that had flipped around to a mostly pro-warming stance by 1975). A possible candidate for cooling was higher rates of emissions of sulfur-laden aerosols from coal burning, which came under regulation in the leading industrial countries starting in the early 1970s. Indeed, the only letter I ever had published in the Washington Post was on precisely this issue back in 1977 (yes, I have been involved with climate modeling off and on for 40 years). And while the dates are propitious and telling, this matter is not really resolved even now.

In any case, it does look like global warming is still proceeding, but at somewhat deep levels in the oceans (yes, there is data supporting this, not just modeling), which at some point will surface to become more clearly manifest. The hacks and innumerates should be more careful about their spoutings, although I have no doubt that this will not slow them down or quiet them.

Barkley Rosser

PS, Addendum: For anybody wanting to look at the global temperature average series by month and half year since 1880, please see http://data.giss.nasa.gov/gistemp/tabledata_v3/GLB.Ts+dSST.txt .

Complete Crowding-Out or Near Identities: Cato Statistical Silliness

2013-05-04T11:08:00.001-04:00

Via David Silby comes a really dumb argument by Cato’s Chris Edwards:

The chart below shows the Excel plot of the results. The downward slope of Excel’s fitted trend line means that higher government spending growth in a year corresponds to reduced private GDP growth that year. For example, if real government spending growth was zero, private GDP would be expected to grow at 4.2 percent. If real government spending growth was 5 percent, private GDP growth would be expected to fall to 2.8 percent.

Aha – statistical proof that fiscal stimulus crowds-out private spending. Oh wait, what did you say David:

What’s really happening, of course, is that during recessions, government spending goes up because of unemployment insurance and welfare programs in general get more (unfortunately) customers. It’s not that government spending knocks down private GDP, it’s that government spending tends to go up when GDP is shrinking.

I was alerted to this Cato craziness by a friend who must have posted this somewhere:

Chris Edwards (Cato) needs to be careful with regressions that only serve to validate identities. Think of the following Y (or GDP) = P (private spending) + G (government purchases. May I rewrite this? P = Y - G. OK if good economic policy keeps the variation in Y limited, then there has to be a negative correlation between P and G - by definition. This does not prove crowding-out all.

I know the folks at Cato what a smaller government but stupid statistics is just embarrassing.

The Case for Precaution: Plan Bee

2013-05-03T17:16:00.001-04:00

The EPA has it wrong and the EU has it right. Here’s the problem: colony collapse disorder (CCD), which has ravaged honeybee populations in several parts of the world, has taken a turn for the worse. About half the US stock of domesticated bees failed to survive this past winter, and growers who depend on these bees to pollinate their crops are worried that this essential work won’t get done. The toll on wild bees is unknown at this point.

In response, the European Union has instituted a two-year ban on neonicotinoids, a class of insecticides widely used in agriculture, while they continue to study the situation. In the US, the Environmental Protection Administration has just issued a report in which they say that there are many potential causes of the bee die-offs with possible interactions between them, and not enough is known about neonicotinoids to take action.

From what I have read, the EPA is scientifically wise and policy foolish. We really don’t know for sure to what extent, if any, neonicotinoids are responsible for CCD, although their persistence and effects logically suggest they should be bad for bees. More research is certainly needed. But this is a classic example of the relevance of the precautionary principle, properly understood.

First, it’s important to be clear on framework for policy analysis as it applies to bees or anyone else. In the past I have railed against the failure of economists to take minimization of Type I error, the risk of false positives, seriously in their ostensibly scientific work. If science is about anything, it’s protocols—including replication, by the way—to filter out those things whose validity is really, really well-supported from those we suspect or have some belief in, but might still be wrong. Naturally, there is no way to move forward without throwing research energy into hypotheses you believe in, but to be a science there has to be a process that filters all these claims and identifies those which, on the basis of careful testing, can be shown to have a negligible risk of being wrong. Economics is very weak on these protocols.

But once you get to policy, the bias toward minimizing Type I error is misplaced. Now both types of error, the risk of believing something to be true when it is false and believing it to be false when it is true, matter. Specifically, they matter in proportion to their likelihood of occurring as well as their projected costs. In the case of CCD and neonicotinoids, Type I error is thinking the pesticides are killing the bees when they aren’t, and Type II error is thinking they aren’t when they are. Any regulatory decision will have to accept one risk of error or the other. The cost of Type II error is suffering further damage to bee populations, while the cost of Type I is the impact on growers of pesticide restrictions that might later be regarded as excessive. One way of thinking about the EU is that they did their calculations and decided to go with the risk of Type I error, while EPA added up differently and came to the opposite conclusion.

Now here is where we get to precaution. It’s true: we have well-founded suspicions of neonicotinoids but insufficient data to be sure. However, what has been our past experience with pesticides? We’ve seen this movie before! Again and again, we have seen previous generations of agricultural chemicals brought under suspicion, with a sufficient scientific understanding trailing behind after many years of research. And what’s the pattern? How often have we seen our judgment of the damages caused by these chemicals rise over time? Just about always! How often has it been that, the more we know about them, the safer they seem to be? Just about never! So what does this tell us about neonicotinoids? The precautionary principle, as I’ve tried to elaborate it, tells us we should learn from our experience when trying to forecast the likelihood and cost of the risks of under- and overregulating. Here the EU, following the precept of precaution, has done the right thing.

Incidentally, this analysis abstracts from two other issues. First, how likely is it that neonicotinoids have other deleterious environmental effects besides those on bees? A study that looks only at this one impact and assumes that there aren’t any others that would impinge on the cost of banning them is substituting tunnel vision for intelligent judgment. Second, perhaps the whole policy analysis thing is simply a front for the political economy of agribusiness. In the US the agrochemical producers and the commodity growers—folks who produce stuff like corn and soybeans that don’t depend on bee pollination—rule, whereas specialty crops that are bee-dependent are disenfranchised at the federal level. In Europe cropping is more diverse. They also have big pesticide producers but are apparently less beholden to them. (Germany, home of Bayer, switched its vote from abstention to support of the temporary ban, presumably because of the charisma of Biene Maja, seen at the top of this post.) One plausible theory is that the policy frames the analysis.

But ideas are not completely irrelevant, and it’s worth making the case for precaution when the stakes are high, as they are here. Support Plan Bee.

NOTE: There is a correction to this blog in response to a comment that pointed out a writing mixup.

Those Ultra-Keynesians at the National Review and the Wall Street Oped Pages

2013-05-02T19:59:00.000-04:00

Ken Rogoff and Carmen Reinhart make this strange claim:

Unfortunately, ultra-Keynesians are too dismissive of the risk of a rise in real interest rates. .No one fully understands why [real interest] rates have fallen so far so fast, and therefore no one can be sure for how long their current low level will be sustained...Economists simply have little idea how long it will be until rates begin to rise. If one accepts that maybe, just maybe, a significant rise in interest rates in the next decade might be a possibility, then plans for an unlimited open-ended surge in debt should give one pause.

Jonathan Portes appropriately responds to this idiocy:

Leave aside the silly straw man (repeated elsewhere) that "ultra-Keynesians" want an "unlimited open-ended surge in debt." Who are these "ultras"? Not Martin Wolf and Simon Wren-Lewis in the UK, or Paul Krugman and Brad Delong in the US. And, as Reinhart and Rogoff know perfectly well, of course we think (and hope!) that real interest rates will rise at some stage, when demand and confidence returns and the private sector wants to invest.

Actually we have seen lots of pseudo economists claiming we can have fiscal stimulus without worrying about higher real interest rates. The Reagan tax cuts were sold on a Laugher of a cocktail napkin where they would so stimulate growth that deficits would fall. The reality is that the Federal Reserve dramatically increased real interest rates, which ultimately lowered long-term growth. The Bush43 tax cuts were sold on a bastardization of Ricardian Equivalence where they were supposed to not affect interest rates even though they raised consumption (which of course the real version of Ricardian Equivalence would deny). These proponents of free lunch tax cuts, however, typically told us how they abhorred Keynesian economists. Then again – these hacks weren’t actually economists in the first place. So who on earth are Rogoff and Reinhardt calling ultra-Keynesians?

Can And Should The Fed Battle Bubbles?

2013-05-02T17:38:00.002-04:00

Probably not very much, even though critics have blamed expansionary monetary policy in the past for exacerbating both the dot.com bubble of the late 1990s and the more recent and more destructive housing bubble whose collapse (and related derivatives markets) precipitated the Great Recession. On April 30 in Washingon, Alice Rivlin declared that everybody at the Fed knew there was a stock market bubble in the late 90s, but had no idea what to do about it, fearing that raising interest rates would just tank the whole economy. At the same function, Donald Kohn said that people at the Fed were unsure if there was a housing bubble or not in 2005, and while suspicious that housing prices were indeed too high, thought that they would be able to come down without damaging the whole economy. Minutes from a crucial meeting on this in June, 2005 can be found at http://www.federalreserve.gov/monetarypolicy/files/FOMC20050630meeting.pdf .

Presentations were given at that meeting taking different positions and with the commentaries all over the place. Janet Yellen, leading candidate to succeed Bernanke as Fed Chair, comes across as possibly the best informed and most careful of all the commentators in the room that day. Looking particularly silly was then St. Louis Fed President William Poole, who argued essentially that bubbles are impossible because people will be rationally optimizing across time periods. Someone taking the possibility of housing bubbles seriously, if not too worked up about the possibility, was then Vice Chair, Timothy Geithner. Curiously, over a year later in September, 2006, after the housing bubble peaked and he had become President of the New York Fed, Geithner became much more concerned about the general state of financial markets, his position being described by Kohn on April 30 as "banging the gong" about systemic risk, although Kohn said that by then "it was too late to do anything about structural changes." Geithner's speech is at http://www.newyorkfed.org/newsevents/speeches/2006/gei060914.html .

While much of the speech was pollyannish, and he made no specific reference to the decline of housing prices or to the CDOs et al based on overrated and failing mortgages, the flavor of much of it can be seen in the following on risk management from it:

"Understanding and evaluating 'tail events' - low probability, high severity instances of stress - is a principal, and extraordinarily difficult, aspect of risk management. These challenges have likely increased with the complexity of financial instruments, the opacity of some counterparts, the rapidity with which large positions can change, and the potential feedback effects associated with leveraged positions."

Anyway, the issue is back and some argue that the latest reports of rising housing prices in many markets, over 12% nationally according to Case-Shiller index for the last year, and over 20% in Phoenix, along with the reports of the reappearance of flippers in some markets, suggest that the ongoing QE policies by the Fed are reigniting the housing bubble, and that therefore these should be reined in sooner rather than later. However, most observers agree with Rivlin that interest rate policies should not be driven by fear of bubbles, but that other regulatory instruments should be used, such as minimum downpayments and the forbidding of interest-only and other unorthodox mortgages. Indeed, a reason to believe what is going on now is not a bubble (at least not yet) is precisely that financial institutions have put in place much tighter restrictions on mortgages that are arguably keeping people from buying homes who ought to be able to do so.

Regarding the flipper situation, it would appear that so far most of these people are dealing in foreclosure auctions, which are quite a different matter from the sort of thing that was going on in the later stages of the housing bubble that peaked in 2006. Indeed, it has been reported that these agents often are fixing up the places that they buy to flip, thereby upgrading damaged properties and thereby improving the fundamental condition of the housing market, rather than generating some new bubble, even in Phoenix. A report on this is at http://realestate.msn.com/article.aspix?cp-documentid=23091817 .

Barkley Rosser

A Year of Constitutional Political Economic Centennials: The Income Tax and the Fed

2013-05-01T17:35:00.000-04:00

It can be argued that 1913 was both the last year of the extended 19th century as well as being the most important for determining the nature of the 20th century, even if "Man of the Century" Albert Einstein had already had his "Annus Mirabilus" in 1905. Most historians see the 19th century Pax Brittanica with its more or less functioning gold standard lasting from the Congress of Vienna in 1815 to the outbreak of World War I in 1914, when the Guns of August destroyed that Proud Tower, to quote Barbara Tuchman. As it was, aside from the two major political economic changes in the US, Stravinsky revolutionized classical music with the premiere of his Sacre du Printemps in Paris on May 29, 1913, and the Armory exhibition in New York brought the developing modern art of Europe (particularly from Paris) to the US as well.

The first of these changes, which solid libertarians view as the awful end of the pure laissez-faire US economy, was in fact one to the Constitution itself, the 16th Amendment, which allowed Congress to raise a federal income tax. Lincoln had done so initially in the Civil War, but the income tax was declared unconstitutional by the Supreme Court in the 1895, after Cleveland introduced another (Lincoln's had been allowed to expire in 1873). While many associate it with Woodrow Wilson, whose presidency began in 1913, in fact it had been long in the making, and its ratification was completed on Feb. 5 of that year, just shy of a month prior to Wilson's presidential inauguration.

As it was, Wilson played a larger role in the passage of the Federal Reserve Act in December, 1913, which also had been long in the making, drawn largely from the Aldrich Plan of 1910 (revised in 1912), which in turn had been instigated by leading bankers after the "Rich Mans' Panic" of 1907. In order to obtain support from populist-minded Democrats in Congress, Wilson added the Federal Reserve Board, which he promptly stacked with hack politicians knowing little of banking or economics, something that continued for some period afterwards, in order to offset the power of bankers over the somewhat autonomous regional Federal Reserve banks that were clearly under the control of bankers and could then set their own disbount rates, and which were the centerpiece of the Aldrich Plan.

Yesterday there was a mini-conference in Washington on the centennial of the Federal Reserve Act with four speakers: Liaquat Ahamed, author of _Lords of Finance_; former Fed Vice Chair and current long list candidate to succeed Bernanke as Chair next January, Donald Kohn; former Vice Chair, Alice Rivlin, and former Acting IMF Director, John Lipsky. Ahamed spoke on the Fed's actions in the Great Depression, noting that the crucial mistake of raising interest rates in Fall 1931 was overwhelmingly driven by the then strong adherence to the gold standard. He also noted the conflicts between the board and the regional banks as well as even between regional banks, such as how in early 1933 the Chicago Fed refused to lend money to the New York Fed when the latter was experiencing substantial gold outflows as hampering Fed policy in that crisis. Persky noted that the Fed is no longer as powerful within the US in terms of regulating the financial sector as is the Bank of England in the UK or the ECB in the eurozone or the Bank of Japan in that country, and that dollars now only constitute 60% of global foreign currency reserves.

In my view the most interesting remarks were made by the former Vice Chairs, both in terms of what happened in the 2008 crisis and what one can do about such things, if anything. As longtime right-hand man of Greenspan and Vice Chair during the crisis, Kohn defended the Fed's actions throughout, although with the caveat of "based on the information that we had at the time." Thus, on the crucial matter of the housing bubble, he recounted three hearings they had on the issue: one declaring that housing was overpriced in 2005, another by someone from the NY Fed saying that the housing market was not a bubble and not overpriced, and another that said it was overpriced by 20%, but that a decline from the bubble peak would lead to no significant harm to the economy. He did admit that by Fall 2006, then NY Fed President Timothy Geithner was "banging the gong" about systemic problems due to global interconnectedness and lack of transparency in financial markets particularly related to derivatives based on housing mortgages, then beginning to go sour after the bubble's peak passed in mid-2006. But Kohn declared that, "By then it was too late to do anything about the structural problems," and argued that the Fed behaved "aggressively" to support the financial system starting with the clearer outbreak of problems in August, 2007.

Rivlin more specifically addressed the problem of bubbles. As Vice Chair in the late 1990s she declared that, "Of course we knew there was a speculative bubble in the stock market," but then went on to say that the policymakers at the Fed did not know what to do about it. She accurately noted that a policy of raising interest rates in order to squash such a bubble would "bring down the whole economy," along with the bubble. Indeed, although she did not say so, such an effort in 1929 was a major contributor to the stock market crash turning into the Great Depression, even though Ahamed argued that the Fed was fairly responsive in the immediate aftermath of the crash. More generally, Rivlin argued that indeed the Fed should try to do something about bubbles, or somebody should, but admitted that even now she is not sure what that should be, important as it is.

Indeed, the issue has reappeared. Kohn admitted that some blame the Fed's relatively easy monetary policy stance in 2003-04 for stimulating the housing bubble, although according to the Case-Shiller index, the rise of the price/rent ratio in housing above historical norms dated back to 1998 when nobobdy noticed it because all eyes were on the ongoing dot.com bubble. But now housing prices in at least some parts of the US are rising again, most dramatically in Phoenix, San Francisco, and Las Vegas. It is unclear if these are moving up more rapidly than rents, which are reportedly also rising, which would be the clearer sign of a renewed bubble, but reports are out that "flippers" have appeared in some of these markets, who can, of course, make money simply on rising prices, irrespective of if those prices are being matched by rent increases or not. In any case, it is quite likely that some of the caution being reported out of the current Fed about any extensions of the QE program and even of slowing it down somewhat soon probably partly reflects internal worries about this possibility of a housing bubble reemerging. We do indeed need tools other than a contractionary monetary policy to deal with such phenomena, even if what we are currently seeing is not a renewed housing bubble.

(For discussion of the need for alternative ways of dealing with bubbles, see Rosser, Rosser, and Gallegati, "A Minsky-Kindleberger Perspective on the Financial Crisis," Journal of Economic Issues, June 2012, 45(2). pp. 449-458, available near bottom at http://cob.jmu.edu/rosserjb .)

Barkley Rosser

Robert Samuelson Sinks Into The End Of Entitlement

2013-04-29T21:40:00.000-04:00

Just when one thinks one has seen the worst out of our favorite non-economist wannabe economic journalist, Robert J. Samuelson sinks lower with a column in today's Washington Post entitled, "The end of entitlement: Americans' lofty expectations get a reality check." Dean Baker has already slammed the basic premise of this piece, that the poor and middle class should just suck it up that they are not going to get "secure jobs...homeownership...ever-more protective government...fixed tax burdens...a college education," because taxes cannot be raised on the rich, http://www.cepr.net/index.php/blogs/beat-the-press/robert-samuelson-tells-the-middle-class-and-poor-that-they-should-stop-expecting-to-have-decent-lives-because-his-rich-friends-want-all-the-money . Dean criticizes several of RJS's arguments, including his contrasting job growth during 1980-2007 with it since then while failing to note the inadequate use of stimulus policies since then, and also his failure to note that in spite RJS's incessant whining about people failing to pay for their "entitlements," the payroll tax was only 6% and was 15.53% in 1990, along with some other points as well.

I am going to pile on also, while making some modifications of Dean's arguments in particular details, although none of these details will let Samuelson off the hook in the least. I note that he is continuing to pound on points he has been making forever, citing a book of his from 1995, _The Good Life and its Discontents_, arguing even back then just prior to the main takeoff of the Clinton boom, that people were delusionally expecting "perfection" rather than mere "progress," although by now he seems to think that people should not even expect any progress either.

Now, let me say that at some level RJS is right, but in this he is trivial and out of date. Basically, the US economy has not performed since 1973 as well during any period as it did between 1945 and 1973, with the possible exception of that late 1990s Clinton boom (which Dean would say was due to the dot.com bubble, although I think there was more substance to that boom than just that). After bad economic performance in the 1970s after the first oil price shock, the 1980s brought some uptick of optimism during the Reagan years, although careful examination of economic performance in the 80s suggests that the performance was not much better than the 70s. In fact, the economy has been gradually declerating more or less since 1973, with an occasional upward blip, with the Great Recession simply pounding this poor performance very hard. Indeed, while Samuelson particularly whomps on Social Security, its future in terms of demography was understood back in 1983 when the Greenspan Commission recommended the changes that would increase fica taxes and reduce the benefits for the baby boomers that are still coming into the system (another round of age eligibilities still to kick in). But this is not enough for that scourge of entitlements, RJS (who, of course, barely mentions the much more serious matter of rapidly rising medical care costs in all this).

One further point I would like to make on this is that in fact Samuelson fails to recognize that with respect to Social Security in particular, the public has a far more pessimistic view than is realistic, even in the face of the ongoing Great Recession (which will come to an end at some point eventually). As it is, RJS along with most of the Very Serious People have been going on and on so long and loudly about how the Social Security Administration will "go bankrupt" if nothing is done that we even have Obama caving to this constant drip drip to pose a cut in the form of the chained CPI-W, even as virtually everybody canned this proposal, with even Republicans threatening to run against this from the left, and, more to the point, the majority of young people do not believe that they will get any Social Security benefits at all. I mean, "bankruptcy"! That must mean the end of the system. In fact, such a bankruptcy would leave recipients better off in real terms if it were to happen than current recipients (see discussion of "Rosser's Equation"), but Samuelson and others are not remotely about to sort this out and make clear that things are not nearly as bad as so many think.

In any case, Samuelson's bottom line on Social Security is not that people have been told overly scary stories, but instead, "Sooner or later, the programs called 'entitlements,' including Social Security, will be trimmed because they're expensive and some recipients are less deserving than others." Would those latter be the well-off? If so, why not just raise the income cap on fica and have done with all this moaning and false whining? And, of course, he fails to note that the program was already trimmed back in 1983, that trimming still coming into place.

Another point is one where I think that Dean is not quite right for once. This involves Samuelson at least partly blaming our supposedly mounting problems on "lifestyle choices," particularly a rising rate of single-parent households. Dean makes the point that it was the 1970s when there was a high rate of increase of such households, and then makes the completely valid point that such nations as Sweden and Germany have high rates of single-parent households while not having the rising poverty rates that we are seeing in the US.

However, in fact there has been a renewed increase of births outside of marriage in the US, with such births now more than 50% for mothers under 30. Furthermore, the highest rate of increase in such rates has been among white women with some college education, http://articles.businessinsider.com/2012-02-21/home/31081751_1_illegitimacy-black-children-unmarried-women . However, besides failing to notice the point made by Dean about performance in other countries, Samuelson also fails to notice the point made by even conservatives such as Charles Murray that what is going on here is not some explosion of irresponsible immorality by white women, what is going on is a collapse of available jobs for working class white males, mimicking what happened earlier for black males. It is well known that a collapse of male employment tends to lead to a breakdown of families,with mothers having to support their children on their own with little increase in government assistance for them.

Finally, RJS accurately notes that big companies are "squeezing fringe benefits." He accurately declares that "the private safety net has shrunk," with both health plans and especially pension plans experiencing this shrinkage. However, somehow his response to this is that rather than having the government step in to offset at least some of this shrinkage, particularly on the pension front, he instead is beating his drum yet again for cuts in Social Security benefits. I am sorry, but does this man even read what he writes, much less think about it? The evidence is clear that he does not.

Barkley Rosser