Nocturnal Economist

Election day 2018

noreply@blogger.com (Stuart) — Tue, 06 Nov 2018 16:56:00 +0000

A cloudy, rainy, colorful fall morning; the dogwood in my back yard is a rich dark magenta, and beyond it in other yards are trees that are bright yellow, green, orange. I should be writing poetry in celebration of fall.

But I find it hard to see all of that beauty today. The world is presenting distractions that are difficult to ignore: today is election day in America.

This is the most nerve-wracking election I can remember. Yes, 2016 was upsetting, but the day before that election we were all but certain that we would survive the week with the long arc of our history still bending toward justice. No one expected Donald Trump to win. No one predicted the last two years of incompetence, meanness, numb bigotry, lies and official race-based loathing from our President, from our Congress and from our Justice Department. No one predicted that acidic hallucinations from the lunatic fringe would swallow the Republican party whole, and since the Republicans control all branches of our government, would swallow the country whole. Today we will find out if this is really what the country wants. If it is, then it will continue: it will, in fact, be inflamed by an electoral validation, and get much worse. If the voting today shows that this has been a big mistake then we might, someday, be able to correct it.

I don’t know what to predict. I think the polls are likely to have wider errors than they have in the past in part because our political affiliations have so divided us. Families are torn apart by them, and so many people have incentive---if they care about family, or friends, or relationships in any part of their lives---to hide their real views. There are, I’m sure, secretive Trump voters, Trump Democrats, who hide their choices from pollsters in order to hid them from their friends. But there are also Republicans who oppose Trump and all of his antics, and they may hide that fact from pollsters who ask. So the polls are a guide, still, but may be far from the mark.

Which group of secret voters is bigger? I don’t know. I think and hope that the Democrats will have a very good day today, and I’m joined in that hope by a very wide range of very conservative former Republican writers. I know that because they’ve said so clearly and openly. Their goal is to retrieve the possibility of a real conservative party in the United States. They have that goal because the Republican party is no longer conservative in any definable sense, and as conservatives they no longer have any political home. I’m thinking of people like Jennifer Rubin, Michael Gerson, Max Boot and Joe Scarborough, all of whom are strongly conservative, and all of whom have written in the Washington Post about their hope that the Democrats do well today so that an honest and actual conservative party can emerge, somehow, and do well in the future.

I share their hope. I’m a progressive, and have always been, but I do think we progressives need a viable conservative party to contest against. It helps us remember what we think, and why, and it keeps us honest.

So honest conservatives and honest progressives have a common cause today, it seems. This election has done that: it pits reality, honesty, and good purpose against corrosive fantasy and brutal meanness.

We’ll see. We’ll see. I’ll spend the day reading, and pacing, and looking out the windows without really seeing anything there., waiting for results that won’t begin to be available until the polls close.

It’s a pretty, rainy fall morning, on what looks like a very long day. Late tonight we will see what kind of weather tomorrow will bring.

The long road to President Pence, and the long road after

noreply@blogger.com (Stuart) — Wed, 17 May 2017 19:15:00 +0000

MSNBC has been agog over the steady flood of revelations, day by day, about Donald Trump, about his behavior, his possible obstruction of justice, the possibility that he is enriching himself by his policies in office, the possibility that he or his staff colluded or conferred with Russia in the subversion of an American election, and all the rest. Lawrence O’Donnell told those currently employed by the White House that it was time for them to “lawyer up”, in the (probably justified) belief that many of them will be caught in the legal shredder as the Trump presidency disintegrates.

Yes. Maybe. Probably, in fact, at this point. But I want to caution against excessive giddiness among progressives about ending the Trump presidency, either by impeachment, which seems more than warranted, or by simply declaring him mentally incapable of doing the job, which seems to be clearly true: neither path is easy, and the result wouldn’t be the great relief it sounds like it should be.

Yes, we are now in the grips of a child president, utterly selfish, arrogant, dumb, bullying, blind to ethics, numbly ignorant of history, and of civics, and of the details of any issue whatever. He is both a delusional fanatic and completely out of his depth. But removal by impeachment requires a majority of the House to impeach, and two thirds of the Senate to convict. Removal by declaration of unfitness to serve is easier in the very short run: the Vice President and a majority of the “principal officers of the executive departments” can write to the Speaker of the House and the President Pro Tempore of the Senate declaring the President to be “unable to discharge the powers and duties of his office”, and it’s (very temporarily) done. But what are the odds that we can get 8 Cabinet Secretaries to sign such a document? And that’s not the hardest part: once it’s signed and delivered, the President can simply write to these same two people, the Speaker of the House and the President Pro Tem of the Senate, and declare that he is able to discharge his duties, and he is back in power as President again. After that Congress is required to determine the issue. Finding the President to be unable to discharge his duties after all of that requires a two-thirds majority in both houses of Congress, and both houses are still in the grip of Trump’s party. So: removal by impeachment requires two-thirds of the Senate, and removal by declaration of unfitness requires, if the President contests it, two thirds of both the Senate and the House.

What this means is that the outcome of any effort to remove him is uncertain, and will in any case take time, possibly a lot of time. If he doesn’t resign, if he’s determined to stay as President, then we’re stuck with Trump for the near future. I wish that were not true, but it is.

But even if Trump is eventually removed---what is the result? Mike Pence as President? At least Pence is sane, I guess, but it’s not exactly every liberal’s dream situation, is it? Ah, but what if the “Russia thing with Trump” (Trump’s phrase) snags Pence as well, so both are gone at once? To which I have to ask, as a first reply, how far into fantasyland are we willing to go? How likely is it that both the President and the Vice President will be impeached? And then, as a second reply, I have to say that even if such a miraculous thing did happen, we’re not much better off.

Here’s the line of succession after the President:

Vice President: Mike Pence.

Speaker of the House: Paul Ryan.

President Pro Tempore of the Senate: Orrin Hatch.

Secretary of State: Rex Tillerson.

Secretary of the Treasury: Steve Mnuchin.

Secretary of Defense: James “Mad Dog” Mattis.

Attorney General: Jeff Sessions.

We can keep going, but it doesn’t get any better lower on the list. Ben Carson is on the list (13^th in line); Betsy DeVos is on the list (15^th). The Republicans control all of the government at the federal level, and at the state level too in most states.

So we get back to the issue I’ve been raising, clumsily, with friends for a very long time: the Democratic party needs to look for the radical solution, in the actual meaning of that word. It needs to return to its roots. It used to be the party of working people---all working people. In Minnesota the official name of the party is the Democratic Farmer Labor party, and that used to be an apt description of the party nationally as well. Farmers no longer believe that to be true---and labor has been increasingly skeptical as time passed, and, in my opinion, for good reasons. A large fraction of the Democratic party, for a time at least, succumbed to neoliberal third-way politics that accepted the rational-expectations, free-market economics of free-trade, small government, tax cuts and deregulation. The economy grew, slowly, but wages didn’t; businesses grew, sometimes quickly, but middle class jobs vanished. And much of the country has just given up on Democrats caring about their neighborhoods, their towns, their industries, or about them. And the result is the county-level election maps that look almost uniformly red across most of the country. Democrats will respond that Hillary got more votes than Trump did, and Democrats get more votes much of the time for Congressional seats as well (when the whole of the country’s votes are added together). But the problem can be seen in this 3D map of election results. The Democratic votes are very localized, mostly to big cities.

The Democrats, IMHO, forgot, for a time, the base that brought them to the dance. All of those people who don't fall into the special categories the modern Democrats care about have to look somewhere else for a champion. They look to Republicans because they're the only other game in town. It's a mirage: the Republicans won't be their champions either. Can't be, if they want to stay free-market Republicans. And if the Democrats won't, and the Republicans can't, those people are just out of luck.

Trump’s presidency, I think, presents all of America with a hair-on-fire emergency that will be difficult to fix. Fixing it, removing him from office, may take years. It might take until the 2020 election. But even after it’s fixed, progressives might still have lost, and might still be lost, if we don’t fix ourselves as well, if we don’t reconnect with a significant number of the people who no longer believe we even want to represent them. We have a lot of fence mending to do. We’d better get to it.

Or, alternatively, we can just get used to the idea of President Pence and a permanently Republican House.

Trump has lost.

noreply@blogger.com (Stuart) — Thu, 11 May 2017 21:20:00 +0000

I'm not sure anyone at the White House recognizes that at this point, after firing three separate prosecutors or investigators, after all the smokescreens and diversions, after the bouts of loony tweets, it's no longer possible for this to have a good outcome for Donald Trump.

He should have the right to the presumption of innocence---sorry, fellow progressives, but he should, as an American and even just as a human being---but he has shredded that presumption by his rage and panic toward anyone who gets close to the investigation of Russian interference in the U.S. election. And now, no matter how an investigation comes out, he will lose. Because if there is no investigation, if he manages to suppress it, then half the country or more will believe that he is hiding something terrible. And if an investigation is pursued and finds his campaign innocent of all wrong, many people, maybe even a majority, will be cynical about that, and will presume that he simply managed to manipulate the outcome. Even if some associates in his campaign are found guilty of being complicit with Russia in this, many people, maybe even a majority, will believe that Trump knew about it at the time, and that he sacrificed his campaign staff to hide his own guilt.

The last possibility, of course, is that a strong independent investigation finds "problematic" (Sally Yate's word) behavior from Mr. Trump himself. What the response to that might be would be interesting, but it certainly could (hypothetically) include impeachment, or even some pretty nasty prosecutions---colluding with a hostile foreign power to subvert an American election is treason.

Which of those outcomes is good for Trump? If he has a long term goal here, a plan that turns all of this to his advantage, I have to admit I can’t see it.

One more comment on Fearless Girl and Charging Bull

noreply@blogger.com (Stuart) — Sun, 07 May 2017 17:40:00 +0000

My brother-in-law Craig posted a link on Facebook to this piece about the Fearless Girl. Since I haven’t posted here for very long time I thought I’d post my response to it. I’ve been following the “Fearless Girl” discussion in WaPo and elsewhere, thinking it’s all a bit off topic…I like both statues, and I think their current positions make a clear statement that’s relevant right now, but it’s not any of the statements that other people seem to see.

The Charging Bull artist does have a point that the Fearless Girl changes the meaning of his sculpture---but he misses the point too, possibly because he's so captured by the meaning he originally intended.

The Bull had already changed its meaning, though, long ago. When he sculpted the bull I think Mr. Di Modica saw Wall Street as a meaningful symbol of the economy in general: a prosperous Wall Street was an indication of a healthy economy. That was not true even then for much of the country, but I think it was what he meant, and the bull was intended to restore all of our spirits after the financial catastrophe in 1987. But since then we’ve had decades in which Wall Street prospered and much of the rest of the country stagnated. The financial sector simply sucked up all economic growth. In 1950 the financial sector was 2.8% of GDP; by 2006 it was 8.3%. In 1980 the average employee in the financial sector earned about the same as employees in any other industry; by 2006 they earned about 70% more than average. (from “The Growth of Finance”, Robin Greenwood and David Scharfstein, Journal of Economic Perspectives, Spring 2013). And the industry, with its high salaries, took the best minds from the best universities and sat them down to pore over spreadsheets. All of this might have been worth the cost if the industry had become more efficient: instead, productivity in the financial sector was at best stagnant.

And then in 2007-2008 the banks and investment houses collapsed, and Wall Street collapsed with them, and the lot of them dragged the world down in the undertow. Wall Street began to be seen as providing the country with little value and enormous risk---not for them, but for us. When the economy was good we got nothing and they got everything. But when the economy failed they still got everything: they got bailed out, and we had to bail them, and the managers who were the builders of the great collapse got single year bonuses the size of our lifetime incomes. The banks played us for suckers in many ways: as Bernie Sanders once said, Wall Street is a place where fraud is their business model.

As labor productivity rose inexorably from year to year and wages stalled, or even went backward, as hedge fund managers and bankers and the financial industry in general sucked in all the growth in the economy and left crumbs in their wake for the rest of the country, we who live in the economy began to see the Bull as representing that culture of fraud and greed. That tarnished the Charging Bull and changed its meaning long before the Fearless Girl came along.

So the Fearless Girl was a response, not to Mr. Di Modica’s original image of hope for recovery, but to the message of blind greed that Wall Street has projected for a very long time. In this case, art is not the unchanging statement intended at its first creation: the older art’s meaning evolves and new art replies. It is a conversation, and one that I think we desperately need to have.

But the Fearless Girl also has a very different meaning than its sponsors intended. Women everywhere have been uplifted by her, to them she is a statement about the need for women to be admitted to the highest levels of management in the financial world. I’m glad for the uplift, and agree with the egalitarian principle, but I’m not sure I see the value for the rest of us out here in the non-finance world if the men at the hedge fund conference tables whose hearts have been grievously damaged by greed are supplemented with a group of women whose hearts have also been damaged by greed (or why would they even want to be part of the industry as it stands?) It’s not really uplifting for women to reach the heights of an industry whose business model is fraud, and whose driving motivation is a covetous lust for personal wealth.

State Street, who commissioned the Fearless Girl, says her importance is not just her gender but also her age: she is a young girl, they say, and so she represents hope again for a better future. I see their point. But to me the most important thing about her is not that she is a girl, or that she is a young girl: the important thing is that she is an ordinary young girl. Look at her: nothing about her says “rich” or “hedge fund” or “executive”. She is a girl we’ve all seen, in city and country, all over the world. Is she stubborn and defiant? Lord, yes, but as a parent who raised a daughter I can tell you that is not an attitude unique to the Fearless Girl sculpture. Girls everywhere are capable of stubborn defiance, even in places where defiance is dangerous, and particularly dangerous for girls.

So I see her---because I like to see her---as representing not only the defiant demand of women for equality of opportunity, or the defiant demand of the young for a future they can look to with hope, but also of representing all of us who are ordinary, who want, defiantly, to say, not to the Wall Street that Mr. Di Modica saw in 1987 but to the Wall Street we see now, to stop all the blind charging, and to come down and live with the rest of us. It will be hard, I know. You’re addicted to your greed, and addiction is hard to kick. But the human world is out here. We work all our lives to create value, and the statistics on productivity say that we create more and more value every year. It’s time for all of us, women certainly but men as well, to share some of the rewards.

I understand Mr. Di Modica's resentment, and I do think he has a point. But I think Fearless Girl needs to be where she is for the moment.

Eventually, if we can re-attach wages and productivity in the economy, I'd like to see her standing next to the bull, both facing the same direction, and both moving defiantly into a common future.

SpaceX, government and creative destruction

noreply@blogger.com (Stuart) — Sun, 03 Jan 2016 23:14:00 +0000

Charles Krauthammer was excited, in his op-ed a few days ago, by Elon Musk’s SpaceX Falcon 9 rocket, which managed to return its booster rocket to land intact. He wrote a column in praise of it, and in praise of the new role of private enterprise in extending and expanding the technology of space travel, particularly the pursuit of space travel at lower cost.

So let me take this rare opportunity to say that I agree with Charles Krauthammer. I agree that this transfer of spaceflight from government to private enterprise is spectacularly good; I agree with all the benefits he sees in it. This technology is, hopefully (and finally!!!) mature enough to allow private visionaries to take it and run with it: many of us have been waiting for this and hoping for it for a very long time. If in fact this technology has reached escape velocity, then I expect the private visionary entrepreneurs to do great things with it, and speed its development along, just as has happened before with many, many other technologies. I expect them to drive the capabilities up and costs down much faster and much more efficiently than government alone ever would---not (or not only) because small-government fanatics have shrunk federal R&D budgets, but because I believe that competition and quixotic personal vision really are strong forces for putting new technologies to work.

I have still, of course, some discomforts with Dr. Krauthammer’s vision. Compared with our overall agreement on the goodness the new private industry of space flight, of SpaceX and Blue Origin and all of their present and future competitors, these are minor things; but as a good hypersensitive liberal they irritate me like a pea under the mattress.

In his column he said this:

“Musk predicts that the reusable rocket will reduce the cost of accessing space a hundredfold…assuming Musk is even 10 percent right, reusability revolutionizes the economics of spaceflight.”

Yes, total agreement. But then:

“Which both democratizes and commercializes it. Which means space travel has now slipped the surly bonds of government…”

The surly bonds of government, the cold government chains that held the whole of spaceflight back…right? Full disclosure: I had a summer job running projectors at meetings at NASA in the late 1960s. I don’t remember anyone there thinking they were imposing “surly bonds” on anyone. On the contrary: they were enabling a new human epoch. Private enterprise, at that time, was not doing space flight, and was not about to do space flight. And: democratizes it??? Ummm….no. This transfer from government to private entrepreneurs emphatically does just the opposite. This un-democratizes it. Democracy is a form of government. It is government that is generally controlled by democratic vote; private enterprise rarely is. From now on, maybe, space flight can be pursued in idiosyncratic and highly undemocratic ways by private investors. Some of their idiosyncrasies will fail, but with luck some will succeed, for a time at least, before being razed to the ground and replaced by new idiosyncrasies, and old failing entrepreneurs replaced by new entrepreneurs with newer visions, in what Schumpeter famously called the “gale of creative destruction” that produces progress in the private economy.

But none of them will have to achieve a democratic national consensus to proceed. That’s kind of the point.

Let’s not forget, though, that getting to lift-off for this industry did require a national consensus, and long, serious government action. We should praise Musk, and praise the virtues of private enterprise, but that does not require us to despise government’s role in this. Government’s involvement in spaceflight was not initially a binding restraint: government, instead, was the founding source of the technology that Musk and others have received. For good reasons and bad---to put a man on the moon in the sixties, or to launch rocket-bombs at London in the forties---governments gave birth this cluster of technologies, and nurtured it through all the hard, expensive years when it could not stand on its own. Now, finally, it has reached maturity, and we hope it can move out. It may still need some help, some initial sustaining government support as the largest early customer, but finally, perhaps, it is robust enough for private enterprise to take it on. But as a rough comparison of public to private contributions to this, Elon Musk invested approximately $100 million, other investors about the same amount, and NASA has invested something like $500 million in SpaceX (see Wikipedia on SpaceX funding here). But NASA has spent something like $790 Billion (current dollars) in the last 50 years to get here (Wikipedia on NASA funding here).

We can’t know whether that long government-led incubation was a root requirement, without which space flight would never have happened. Perhaps it would have---after another millennium or two. But this is one of government’s best roles: incubating research and development that is so long term or so large scale that private enterprise either can’t or won’t pursue it on its own. The end result of this activity by government is not just the fulfillment of some motivating national goal. It’s not even the laudable goal of advancing science. The real, long-term result of the moon landings and the mars missions and all the rest was SpaceX. Not SpaceX specifically, but the possibility of SpaceX and of all of the others that will swarm after it, the possibility of one or many industries that will employ many millions of people.

And as someone who worked at NASA in the 1960s, very briefly and at an invisibly low level, I can tell you that we knew that. Did you think we were just trying to give Alan Shepard the opportunity to hit a golf ball on the moon?? We were creating the human future. We were establishing the foundations on which vast future industries would flourish long after the moon landings were over. We knew that from the start.

On Archangels, eye makeup, cultural narcissism, and, y’know, stuff like that.

noreply@blogger.com (Stuart) — Wed, 09 Dec 2015 00:45:00 +0000

I’m sitting in my back yard, without a coat, without a sweater, listening to the rumble of lawnmowers on the morning of December 5^th, 2015. I should write a post about global warming, I guess, and this post may come to that in the end.

But something else has been on my mind overnight.

No, not shooters in San Bernardino, or refugees from Syria, or walls along the border with Mexico either, although it may come to those too, in the end. The list of things it may come to in the end is long.

I’ve been thinking about the sublime voices of Goths. Well, of a particular, modern Goth.

Ok, that’s obscure. I’ll explain. I’m sure this is some kind of deeply embarrassing sin. But as long as you promise not to tell anyone, I guess I can confess.

Sometimes, following the crazy tangle of links down the right side of the YouTube screen, something about the picture that YouTube displays for one of the “got talent” performances catches my attention. So I glance furtively around to be sure no one is looking, and then click on it. I did that a day or two ago, and I found….

Andrew De Leon. Yes, from 2012. Since I only see these things on YouTube, and only when I chance on them, I’m always late to find them, and others are way ahead of me. But if you’re not, if you haven’t heard this young man, take a few minutes and just listen.

Start at his first audition here. Really: you have to look at that first audition first, or the rest of the post will be confusing. So go watch, I’ll wait. Don’t be afraid. His eyes may look like they have x-ray powers, but there is no great harm in them. (At least I hope not. Andrew, take note: if you actually do have x-ray powers, please use them only for good.)

Are you back? Amazing, wasn’t it? All of that from solitary practice in his room. It is one more bit of evidence that there are exceptional things happening in well hidden places everywhere, things we can’t know about because the people doing them, for whatever reason, are keeping them close, keeping them from our sight.

Now watch Andrew in his semifinals. I want to say up front that this is what can happen to a nice, cloistered young Goth when he’s exposed to the defiling influence of the outside world. I want to say that, but I suspect this was in him from the start. But you decide. Go ahead, please: Here’s the link. (Crank up the volume for this one…and full screen, too; much of what I reacted to was visual.)

Did you notice that last note, the last “Amen”, and his eyes as he finished and looked down at the judges? At 1:38 in the video.

I do understand that the quiet smile on his face is just a sense of blessed relief that he nailed the high notes, combined with a quick check to see what the judges thought. But that look! At that point, after that elegant, sweet, mesmerizing performance of a religious work, on that stage lit like a gothic cathedral, with spots like rays of holy sun transformed to gold or blue through a stained glass window, he looked like a portrait of a saint, or an angel (or maybe an archangel since parts of the lyrics of his song were originally provided by Gabriel). At that instant those astonishing eyes looked as though they were seeing through the judge’s bodies and seeing their hearts and souls, and forgiving them in spite of that. I am not religious; the opposite, if anything. But at that instant, just for that instant, I felt a disturbing tremble in my disbelief; a kind of minor crisis in my lack-of-faith. Andrew at that instant seemed to release his inner archangel. How many of us ever have the courage, or the ability, to do that? I was transported out of the drab world by his performance.

Simply awesome.

It was a comment by one of the judges afterward that brought me back to ground again. Sharon Osbourne---yes, Ozzy Osbourne’s wife---recommended that Mr. De Leon dispense with his Goth look so that he could be taken more seriously. His look was too exotic for Ozzy Osbourne’s wife?? Really?? That’s a little weird. But of course she didn’t say that, exactly: she took him seriously and she loved him from the start and said so. And the audiences clearly loved him. She meant that for the sake of his career he might need to be taken seriously by the rest of society, all of it, even by the more rigid subcultures in this land of the free that might dismiss him because of his appearance. And I know why she had that fear for him. We all know. There is across the world, in every different place and time, a cultural arrogance, even in the smaller cultures, in regions or religions or classes or races, a subcultural arrogance, a sad, vulgar, coarsening subcultural narcissism, that wants to see in others exactly what we think we see in ourselves. Sameness is comforting and undemanding. Difference, on the other hand, is threatening, and there is an instinct to spurn and repel it.

And that made me think of our national response to the Syrian refugees, and to all the refugees across the world that are desperate for help. And it made me think that if we allow global warming to continue there may be many more refugees in future decades, refugees from hunger, disease, and yes, war, a wild assortment of them in all kinds of colors and religions. We may even be among them, or some of us may. There is precedent in this country for mass displacement by environmental disaster. When was the last time you read The Grapes of Wrath? (Hey, I did warn you up front that it might come to this in the end.)

But enough, for now, of that. This day in the sunshine, in my back yard on the warming earth, is too nice to start down that road. I’ll have to do it, but tomorrow, or the next day, or some day after that. I’ll have to write a quick post explaining to all the Governors who are refusing the Syrian refugees, including my own state’s Governor Hogan, that it’s possible to see difference not as threatening, but as energizing.

But for now, to Governor Hogan I will just say:

“Do not neglect to show hospitality to strangers for by doing that some have entertained angels without knowing it.”---Hebrews 13:1

And to Mr. De Leon I will say: thanks for that radiant Ave Maria. Stay Goth as long as you like; it looks good on you. You labored on your voice alone in your cloistered room, and labored also on your look, and created your own excellent art in both efforts. You created yourself. From all appearances available to me in these two videos you did a damned fine job of it. I think we can trust you to continue to create yourself in the future.

And to you readers, who now know my secret weakness, my embarrassing habit of YouTubing talent-shows, I’ll just quote the famous prayer of that other sinful hedonist Saint Augustine of Hippo: “Lord, grant me chastity and continence---but not yet”.

Greece off the grid and other Greek stories

noreply@blogger.com (Stuart) — Mon, 27 Jul 2015 13:14:00 +0000

There were small craft warnings out on the Chesapeake yesterday, so of course I went sailing. No rain, no storms, just sun, wind, and a field of whitecaps all across the bay through a long afternoon. On a day like that, though, in small craft warnings, in wind creating waves up the whole fetch of the Chesapeake, sailing is, let’s say, not entirely a passive experience, so I’m a bit stiff this morning. And I was awakened this morning at a crazy early hour by thunder and a brief but energetic rain. So I’m not out walking or running, or any of those things I keep trying to do to keep from aging too fast.

Which means I’m sitting idly on my couch at 6:13 AM, wondering what to do with myself.

I guess I have a few minutes to write. So I might as well say something about what I thought was the most interesting piece in yesterday’s Washington Post: it was on the Sunday Opinion page, at the bottom, but it wasn’t exactly opinion. It was simply an observation. In the print version it was titled “Greece’s invisible economy”, but online it seems to be titled “Lessons in resiliance from rural Greece”. In it, Alexis Adams, a resident of Red Lodge, Montana (but also apparently a resident of Leonidion, Greece), described a side of the Greek economy that will be largely undisturbed by the negotiations with Europe, or with the IMF, or with a change from the Euro to the Drachma, or the New Drachma, or as Mr. Adams points out, to the Obol, which was the Greek currency 2500 years ago. As you might have guessed, he was describing the traditional lives of rural Greeks, where “traditional” is a condition established over centuries, or even millenia.

Here’s a snippet from Mr. Adams’ piece:

“my neighbors in rural Greece carry on with their lives as they have for centuries. Invisible to most economists, they subsist in ways that cannot be measured easily by typical economic yardsticks. Nonetheless, their economy is real, will help them survive the current crisis”

His whole story, but particularly this quote, reminded me about something I’ve talked about here before (using Malala Cake as an excuse): GDP is a very rough estimate, and it very specifically does not include non-market activity. It does not include household production of things. So he’s probably right that the Greek GDP measures includes very little of the economic activity of Mr. Adams’ neighbors. They grow their own food, make their own cloth, and raise sheep and goats that provide them with milk and cheese and meat. Since these things are not bought or sold in markets, they do not appear in the GDP. But they are, without question, economic activity of the most basic kind.

And Mr. Adams declares that 39% of the Greek population lives like this.

The official measure of the ratio Greek government debt to Greek GDP is up in the range of 170% these days, but Greece’s GDP is severely depressed. It has declined by about 25% since 2008. If the Greek GDP even returned just to its 2008 value, the debt-to-GDP ratio would decline to about 130% (very rough numbers). But that doesn’t account for any possible growth in potential GDP for the last 7 years. And if Mr. Adams’ data is right, it takes no account at all of much of the production of nearly 40% of the Greek population.

The other interesting comment on Greece yesterday, or perhaps the day before, was this column by Joseph Stiglitz, Nobel Laureate in Economics and former Chief Economist at the World Bank. Prof. Stiglitz has an even more caustic view of the European agreements with Greece than I do. He says:

“One underlying problem in Greece, in both its economy and its politics, is the role of a group of wealthy people who control key sectors, including banks and the media, collectively referred to as the Greek oligarchs.”

And

“The rationale behind many of the key structural reforms has not been explained well, either to the Greek public or to economists trying to understand them. In the absence of such an explanation, there is a widespread belief here in Greece that special interests, in and out of the country, are using the troika to get what they could not have obtained by more democratic processes.”

And

“…special interests in the rest of Europe and some within Greece itself have taken advantage of the troika to push their own interests at the expense of ordinary Greek citizens and the country’s overall economy…When a country is down, there is all manner of mischief that can be done.”

And he, like many others, is skeptical that the current agreement will work at all, unless there is a quick and substantial change in the strategy of the European Commission and the European Central Bank (the IMF has already changed its strategy proposals for the better). The expanded austerity will do nothing but expand the Greek depression, which will, by the same kind of arithmetic I used above, drive the Greek GDP further down and the Greek debt-to-GDP ratio up. And as increasing unemployment and inequality mount, so will resentment.

At least for 60% of the Greek population. The 40% that Mr. Adams has described will apparently simply continue their lives as they have through all the history that has washed over them and around them over the last millennium or two.

Disgust first. Then frustration.

noreply@blogger.com (Stuart) — Tue, 21 Jul 2015 01:50:00 +0000

Good lord.

This has been in progress for a couple of days, and much of it is old news by now. But I’ll record my own take on it anyway.

Last Friday I wrote out a little frustration with Greece, expressing the daydream that maybe we could get Donald Trump out of our hair for a while by sending him to Greece to teach Tsipras how to negotiate. That used to be something Trump had a reputation for doing well, and Tsipras, apparently, has no clue about what it even means. But I waited to post what I wrote on the count-to-ten-first principle. Then Saturday I was out all day teaching a sailing class on the Potomac, and was thoroughly tired and hot when I got home. So I waited until yesterday morning to look at it again.

Sigh…

I’ll get back to Greece in a minute, but I have to follow a distraction from yesterday morning’s news first. I’ll say this up front: Mr. Tipras, I withdraw my threat to inflict Donald Trump on you to teach you the art of negotiation. No matter how good at it he is, it would not be honorable any more to inflict him on anyone, for any purpose.

Donald Trump was back on the front page of the Washington Post yesterday, and has been on all kinds of news since. I supposed it’s good for his campaign in the very short run. This time he declared that Senator John McCain is “not a war hero” on the grounds that McCain “was captured”. Apparently heroes, to Trump, are people who don’t get captured. That’s what he says, anyway.

Seriously?? Wow. This on top of the florid ignorance he excreted on the topic of Mexico and our southern border. And the idiocy of the “birther” episode. And, and, and. Yesterday morning’s mental oddity from him is minor, really, compared to his past exhibitions. But it was, I guess, that final straw for me. I can’t understand why the Post published this about him, or why anyone anywhere publishes anything about him. He no longer seems to me to have public prospects, or even public interest.

For the record, I don’t have any problem with Trump when he disagrees with Senator McCain on issues; I often disagree with Senator McCain on issues, and I’m sure that he and I were in very substantial disagreement on many issues in the sixties, when he was a POW in Vietnam. But go read the Wikipedia entry on his treatment as a prisoner, and how he responded to it. He suffered terribly as a POW, through long years, with broken limbs, a shoulder crushed by a rifle butt, years of solitary confinement and daily beatings, and he showed honor, commitment and courage that was nothing short of astonishing. He still shows honor and courage, working for his beliefs every long day with deep injuries from that time that have never completely healed, and can’t ever completely heal. He was a hero, and he is a hero. He is wrong, in my opinion, about many things. But he is still a hero.

As a presidential candidate Trump is a caricature of everything; he’s a caricature of himself, of the tea party, of the Republican Party, of some smarmy, ugly sliver of America. He’s a Rorschach test, a blot of ink splashed across the political world. A clown, of course, and I have to agree with the new Huffington Post policy of reporting his antics in their Entertainment section, instead of in their Politics section. The Washington Post, and every other reputable news source, should follow their lead. And actually, I think they should go farther: don’t report on him at all. What could he say by now that would actually be either news or entertainment? Nothing.

I think Trump might even have thought, for a time, that he was really running for President. But any such fantasy on his part should now be over. He expresses the emotional responses of a small group of voters who will be avid for him, for a while. But he has offended so many, and so severely, that I can’t imagine any general election where he could win any office at all, much less the office of the President and Commander in Chief.

Now on to Greece, the future, the negotiations with Europe, and anything, however dismal, that does not include Donald Trump.

So here’s my question:

What on earth could Tsipras have been thinking when he went into the negotiations with Europe asserting that he had not been authorized by his voters to exit the Euro? What, then, were the negotiations about? What did he have to offer, or to threaten if it came to that? He simply threw himself on their mercy, and when that was lacking he submitted all of Greece to a spanking.

Here are the basics, Alexis. May I call you Alexis? The fixation of the rest of Europe was this: how do we make Greece behave, how do we hold their feet to the fire, make them pay their debts and push their budget even further into primary surplus, how do we push Greece to fiscal virtue no matter what the short term cost to them? That’s what Merkel and all the rest walked into that room determined to do. That was their goal. Your task, the first day, was to change the topic of the negotiations. Your task was to make the whole discussion about this: how do we, Europe, get Greece out of this depression, this catastrophe worse than the Great Depression of the 1930s? Because that’s the kernel of the problem, isn’t it? If the Greek depression disappeared, then Greece would be far more able to make the the payments on its debt. If Greece could reach its potential GDP, then the budget would be in substantial primary surplus and the debt to GDP ratio would not look nearly as scary as it does.

And to do that, to change the topic, you had to make them believe that no agreement that did not achieve at least a hope for foreseeable, predictable, reliable Greek recovery could possibly be accepted.

I need to stress at this point that Greece does have internal problems that have to be fixed, period: corruption has to stop, cronyism has to stop, the Greek people have to pay the taxes they owe, and so on. And there are many things that could be changed to make your economy work better. But you know that. You don’t need Europe, or me, to tell you any of that. You could offer those things in the negotiations, since you will have to do them anyway. But more austerity, more grinding poverty, more depression, more insistence on paying back loans that can’t be repaid, are not among the things that will help Greece---or Europe either, for that matter.

And those last things were the topic that the rest of Europe walked into the room to discuss.

How could you change the topic? You had to make them understand that you had a ready alternative to their help, and that you were prepared---reluctantly, but still prepared---to use it, unless the negotiations could find a better way.

I know, easy in hindsight, and I do understand that Grexit would have been very hard. Just the logistics of changing to a new currency would have been a nightmare. And I know that the probability that you would have to exercise your Grexit option would have been far above zero; some in the negotiations seemed---and still seem---to welcome that idea.

But now, now, with this “solution” in place, I feel the likelihood of eventual Grexit has done nothing but rise. This “solution” is not a solution. Not really. It’s a thin patch on a blown tire, and an enduring grievance, and it is an engine driving Europe apart.

I understand, Alexis, what you meant to do. You went to Europe with every faith in their good will. You did depend on the goodness of Europe, which was wonderful of you, but naïve, perhaps, since everyone in the room was an elected politician who had to report back to the voters in their own countries. They would loved to be good, but their first obligation was to their own constituents, not to you. You let the conversation devolve to such a dismal state that the primary question seemed to be whether Europe could “trust” Greece. Trust Greece to do what, for God’s sake?? Bend over and grab its ankles? The right answer should have been: yes, you can trust Greece to do everything, everything, that is necessary for Greek recovery, and you can trust Greece to hope that is possible within the Euro: because we do hope for that. In our deepest hearts we want that. But we must emerge from economic cataclysm. You, the rest of Europe, can choose to help, or can choose to stand aside. The right answer should have been: please, help us, we would welcome that, we want that, and to survive as a common currency zone Europe must find a way to do that not just with Greece but with any member country that is in deep depression. But if your minds or values or whatever is binding you can’t find a way to help us then it will not be left to you to decide whether you will stand aside. Let’s find a path together, please; that is the path we want. But if we can’t achieve that, if we in this room can’t find a way to work together, then Greece will take the only path remaining to it toward a credible, sustainable, growing future.

Here’s what you had to do---HAD to do, with no real alternative as a negotiation position:

You had to walk into the room, the first day, with Greek exit from the Euro all lined up, all prepared, planned in detail and ready to go. You had to tell everyone in the room that Grexit was not desired, but it was prepared, that you could start printing Drachmas at a moment’s notice. You had to tell them that you desperately wanted to be a part of the Euro zone, that you never, never wanted to start Greek exit, but that your number one priority was that depression in Greece had to be stopped one way or another. That, you should have told them, was the only real topic of negotiation. Then the negotiations would not be about how to make Greece behave, or even how to preserve the Euro, it would be about how to make Greece grow again, preserving the Euro whole if those two goals could be jointly achieved. But in the order of importance, Greek recovery was first.

You had tell them this: I know you, Europe, don’t want to delay the repayment of your loans, but you have no choice in this. We, Greece, can’t repay those loans while we are in a deep depression: either you find a new loan structure that is viable, and that will help Greece, or Greece on its own will design that new loan structure and Greece will choose how to delay the payments. Whether or not the loans will be delayed is not something that either Greece or her creditors have the power to decide. History and years of austerity have taken this decision from all of our hands. All we are talking about here is whether there is some way, some European way, to help a member state get out of depression and still remain in the Eurozone. Any other topic is a useless waste of time: tell me now whether we can keep to the true topic, or let me leave and get started on the terrible task of exiting the Euro.

Yes, you should have said, under the current regime the European Central Bank can starve the banks in Greece. But the moment these talks fall through, the moment it becomes clear that the ECB really does intend to starve the Greek banks, I can start printing Drachmas and Greece can provide our own banks with the liquidity they need.

Yes, Greece has debts, and (you should have assured them) we intend to repay them. But recovery is a prerequisite. You can try to insist on the current loan schedule, if you like, and within the Euro that would drive Greece to the ground, and your insistence would turn to ashes; the loans as they stand are not sustainable. You know that. The IMF says so, in well-reasoned erudite papers. We in Greece feel that truth every day. The loans will be repaid when we can manage that. We want Europe to have a way to help us, to find a way to help us get to recovery, so these loans can be repaid in full. But if you can’t do that, if we in this room can’t find a European path, then Greece can finance its own recovery both with reasonable domestic spending and by depreciating the New Drachma against the Euro and the Dollar and everything else, to stimulate exports and provide new demand for our products.

With that background, with the plan B in place, the plan and all the preparations in place, to leave the Euro, you might have been able to change the topic of negotiation from “how do we get those blasted Greeks to behave” to “how do we help Greece to recover, so that Greece can finally grow, prosper, and fulfill all its commitments within the Euro”. You could have changed the topic because you could have told Merkel, Scheuble, and all the others in the room that they were not in charge of the negotiation. No one is in charge of the residue of history. The loans would be delayed and restructured because history had left no other option on the table. Greece had a path to hope, had a path to growth, prosperity, and fulfillment of its commitments---a bit tardy, perhaps, but fulfillment still, by exiting the Euro. Their job in the negotiating, given that, was to find a second path, a path within the Euro, to Greek prosperity.

You needed to walk into the room with that all in your back pocket, truly prepared, with the new Drachma all designed (possibly with the word OXI stamped all over it), the right counterfeit-defying paper on the rolls, the printing presses ready to go, and with the preparation in your heart to flip the switch and turn them all on. You needed to do that because you wanted, and the Greek people want, to avoid flipping that switch, and changing the negotiating topic was your only real long run hope of doing that.

But without agreement on a valid plan out of here, this crisis will happen again, and again, and again, as long as Greece and Europe keep reeling down this long divisive road. And at every crisis, Grexit will rear its head.

I hope I’m wrong about that. Of course I do. Maybe it all will look better tomorrow, or the day after. Maybe Europe, now that they have brought Greece to heel, will suddenly become her benefactor, with some kind of Marshal Plan for Greece. But for now, I don’t see that. For now, the current agreement seems unlikely to work, and has only made the situation worse. I hope I’m wrong. But for now, that’s the way it looks to me.

Greece

noreply@blogger.com (Stuart) — Wed, 08 Jul 2015 00:05:00 +0000

Greece! Greece! Everyone is commenting on Greece, including many of my favorite bloggers: Paul Krugman, Jared Bernstein, Brad DeLong---but as brilliant as they are, they are not the right place to go on this. With respect to Greece, read Steve Randy Waldman. He says many of the things I meant to say, but didn’t, and several things I never thought of, or didn’t know. Here’s a quote from Waldman to tantalize you before I move on:

“It is difficult to overstate how deeply Europe’s leaders betrayed the ideals of European integration in their handling of the Greek crisis. The first and most fundamental goal of European integration was to blur the lines of national feeling and interest through commerce and interdependence, in order to prevent the fractures along ethnonational lines that made a charnel house of the continent, twice. That is the first thing, the main rule, that anyone who claims to represent the European project must abide: We solve problems as Europeans together, not as nations in conflict.”

Read his whole post, which is full of detail and insight.

There are a couple of things I want to add to what Waldman said in his post.

My first point to add: there are leaders in Europe who complain that the European taxpayers should not be expected to pay Greek debt. The problem with this complaint is that the European taxpayers will not need to pay the Greek debt any more than they already have. At this point acquiring Greek debt by other European taxpayers is a sunk cost; the question is how to best protect those taxpayers’ future interests. The choice before them now is to accept reduced and extended loan repayments with Greece inside the Euro, or accept those same reductions and extensions with Greece outside the Euro.

Yes, much of the Greek debt is now owned by other European governments or the European Central Bank rather than by private banks, although whether that first “bailout” was to aid the Greeks or the banks is a matter of interpretation. Here’s what Waldman says about that (echoing many others from 2010 onward, but I think Waldman says it better):

“With respect to Greece, the precise thing that European elites did to set the current chain of events in motion was to replace private debt with public during the 2010 first ‘bailout of Greece’. Prior to that event, it was obvious that blame was multipolar. Here are the banks, in France, in Germany, that foolishly lent. Not just to Greece, but to Goldman’s synthetic CDOs and every other piece of idiot paper they could carry with low risk-weights. In 2010, the EU, ECB, and IMF laundered a bailout of mostly French and German banks through the Greek fisc.”

And to bail out “mostly French and German banks”, the French and the German governments put up the largest chunks of the bailout money, so they now own the largest chunks of the Greek debt. But does anyone really think that tax rates in Germany or France will rise if Greece delays repayment of its debts to those governments? Or even if the debts are completely written off? The governments of those countries might experience some frustration, but their taxpayers would not notice any change in their lives at all.

A chunk of the Greek debt is still privately owned. So to the private banks and the wealthy private creditors who still own Greek bonds, I would say: you bought Greek bonds because they offered the highest yield you could find. The reason the yield was that high was that the bonds were risky, of course. You knew they were risky. But for whatever reason, whether you rationally believed the risk was less than the interest rate implied or you were irrationally reaching for yield out of desperation, you bought them. Well, sometimes taking those high-yield risks works out for you. But the meaning of the word “risk” is that sometimes it doesn’t. Suck it up.

On to my second point: everyone is saying that Greece will face some kind of disaster if they leave the Euro. My question is: compared to what???

Economically, Greece is a massive disaster right now, and with the deals offered by the rest of Europe, will remain a disaster far, far into the future. Europe is offering Greece a future without hope. A separation from the Euro and a return to the Drachma might be harsh, chaotic, at times possibly miserable, but at least it has a long-run positive buried in it somewhere: that the Drachma could devalue and make Greece’s exports cheaper and more attractive in the rest of the world, so there could be the long-run hope, at least, of an export-led recovery.

But continue on the current path? The Greek banks are already closed, or nearly so. And here’s a graph that’s been wandering the internet, comparing Greece in the last few years (blue line) to America during the Great Depression (red line). (I found it here, chart 4):

If there is another turn of the screws of austerity, as Europe has until now demanded, that blue line will very likely turn even further down, or stay down even longer, or both, with no distant clear prospect that looks like hope. What is going to create a recovery in that scenario? Yes, I know, nothing lasts forever, so I assume that eventually things would change, possibly even for the better. But there’s no obvious process that improves anything anytime soon.

Here’s another graph that I found here:

This charts the downturns during the recent recession in other European countries against the downturn in Greece; the dark blue line at the very bottom, of course, is Greece. In each case, the GDP is plotted as a percent of that country’s GDP in 2008, which is the white dot on the 100% line.

The Greeks are exhausted by depression, sensibly fed up with austerity, and definitely fed up with haughty condescension from the rest of Europe. Yes, the various Greek governments since the late nineteen seventies have helped create their own problems, with decades of corruption, political nepotism, and even cooking the books. But the Greek people didn’t do that, and it’s the Greek people who are now living through a depression with no end.

What is happening now, to Greece, seems to me to be exactly the opposite of what the financial system is supposed to do. It’s supposed to allocate money from those who have it to those who can best use it, who can use it, that is, for the best interest of the general economy. It’s supposed to help the economy, improve the economy. What is happening now is that the European financial system is sabotaging the nation of Greece, systematically destroying the Greek economy, and crippling generations of Greek people.

What should happen now? I don’t know, precisely: but whatever is done should offer hope to the people of Greece. Not the harsh Austerian hope that says someday, if you only believe, things will get better by magic. And not the moralizing threat that if they don’t pay up the European austerity enforcer, the Confidence Fairy, will smite them in her terrible wrath. No, it has to offer real hope, in a reasonable time.

This is what has to be understood by Greece’s European creditors: any deal they offer has to contain more hope, and better long run prospects for Greece, than Grexit does. Otherwise why should Greece accept it?

A long, late comment about that Omega point….

noreply@blogger.com (Stuart) — Sat, 27 Jun 2015 19:43:00 +0000

One of the problems with working all day and only writing here at odd moments in the evening, when I have energy and inspiration, is that I’m always late to every good party. The Omega point discussion I want to write about is already very old news; it was on and over weeks ago, which is a few long epochs ago in interweb time. But there were things about the whole conversation that enchanted me, and others that bothered me, so I might as well write those things down.

So here it is: a few interweb epochs ago there was an exchange of bewilderment between Martin Feldstein and Paul Krugman. Feldstein was bewildered by the fact that the Fed’s flood of new money in the last few years has not yet created the corresponding flood of inflation or even the long run expectation of inflation that he (and many others) predicted, based on something like a quantity theory of money (“inflation is too much money chasing too few goods”). And Krugman was bewildered by the fact that Feldstein was bewildered, since stable prices when interest rates are at the zero lower bound and the “natural, full-employment” interest rate would be much lower than zero is what HE predicted, based on something like the old Keynesian or Hicksian IS-LM liquidity-trap model.

The contesting bewilderments between these two very smart economists does raise a question: why does it exist so strongly when both of them based their predictions and bewilderment on well known, widely taught economic theory? Neither was dealing, I think, with any theory that the other did not completely understand and, in one way or another, even accept.

Then a few weeks ago Brad DeLong suggested an answer: what you predict depends on how far into the future you think the Omega point is, and how strong you think its influence is on the what is happening now.

The Omega point?? I didn’t recognize that from my Econ 101 text. I had to look it up. If you feel up to an excursion into entropy and evolution and cosmology and the nature of time and God, follow the link to Pierre Teilhard de Chardin, But for now, let’s just say that the word that DeLong used may be non-standard in economics, but the idea is strong in the economic imagination: the point DeLong is talking about is an ideal, theoretical condition out there in the temporal distance that is pulling at us, tugging us toward it. It is final result of all that is happening now, the time when all economic discord and turbulence will cease, when prices and wages all have adjusted, and the thing that people in the econ biz call the velocity of money will have stopped gyrating all over the place, and will have settled wherever it is supposed to be. DeLong even says this directly; he says:

“At that time the money multiplier will be a reasonable and a reasonably stable value. At that time the velocity of money will be a reasonable and a reasonably stable value. … And at that time the price level will be proportional to the monetary base.”

Assuming that nothing else happens to knock us off our course---no new crises, no earthquakes or tsunamis or plagues, no major wars, no long-simmering industries suddenly bursting out and changing the world, no fundamental political changes that bend some cost curve up or down or sideways, no new bubbles or panics or manias, no out-of-the-blue, irrational desolation or exuberance---assuming that we are left alone to move where our current Omega point lures us, it is the point at which we will settle in the end. It is, finally, the Fabled Economic Long Run.

And DeLong’s post starts by repeating the last phrase of the famous quote from John Maynard Keynes, in which he states that “in the long run we are all dead”. Keynes was complaining, long ago, about economists who constantly refer to the long run and tell us all to be patient while we get there. Keynes said: “Economists set themselves too easy, too useless a task, if in tempestuous seasons they can only tell us, that when the storm is long past, the ocean is flat again.” And in saying that, Keynes tells us that he thinks that when times are very hard or very turbulent, whenever, that is, people or politicians might turn to economic theorists hoping they might at last be of some real use, precisely at those times something very basic has pushed us far from long run equilibrium, and the Omega point might at exactly those times have raced far, far ahead of us into the distant future. In fact (I think he might be saying) we are in a hard and turbulent time because the Omega point has raced ahead, and because there are barriers of some kind between it and us, and because it will be hard to get to it. If it were easy to get to and there were no barriers to keep us from it we would be in it already, and the ocean would already be flat. At times like that, he’s saying, the Omega-point-long-run is often so far off that it’s not a proper subject for economic thought. The proper thought during a storm at sea is not a daydream about how peaceful it will be when the storm is over. That may be tempting, but it’s not useful. There’s a lot more practical value in thinking about how to survive the storm with as little damage as possible.

One possible response to that view is to deny that the long run can really move as far as that into the future, but DeLong (along with most economists these days, I hope) has seen enough of reality to know that it does not look like that. Another response, the one DeLong describes in his post, is this: the Omega point may be far away but it is still very powerful. It may not even exist anywhere but in the imagination of economists and economic actors (like bankers or businessmen or workers or consumers). But the imagined Omega point changes their---our--- current behavior. A whimsical analogy: it may seem serene sitting on the level sand in the top of an hourglass, but you know how an hourglass works. If you were sitting there on that sand you would know that deep beneath you is motion and drift, and that soon you would feel it, soon you would have to react, soon serenity would dissolve and you would be pulled through the vortex to the Omega point below. And knowing that, you might react immediately to prepare, even though the sand you now sit on seems placid.

Of course it’s common, and has been since somewhere around 1950 or so, to see the short run as Keynesian, and the long run as classical, and where you sit on the spectrum of ideology may depend on, or may determine, which of those two models you find most immediately useful, and on when you think the long run will arrive. But DeLong, I think, was saying it depends also, or also determines, how you think the short run becomes long. He paints a vivid picture of a “backward propagation” of behavior that is caused by our awareness of the distant Omega point, and how that might create a quick, even nearly immediate, economic response to large rises in the money supply, since current economic actors would feel in their bones that someday, as the Omega point nears, that increase in money would create inflationary pressure. They would feel in their bones that because of how they believe the economy works there is already motion and drift beneath them, invisible, but there, and they would begin to prepare for the vortex they know is coming. Because inflation, the Quantity Theory tells us, is always and everywhere a monetary phenomenon. And because economic actors, even though they may not understand it on a theoretical level, on a mathematical level, are nevertheless saturated with a devout faith in the Quantity Theory.

As DeLong says this idea explains why economists with the same theories might differ in their beliefs even about what the near future holds:

“…beliefs in 2008 and 2009 that economies’ stays in liquidity traps would be very short…and beliefs since then that those who believe will not taste death before, but will live to see exit from the liquidity trap and an outburst of inflation as the Federal Reserve tries and fails at the impossible task of shrinking its balance sheet to normal without inflation–all of these beliefs hinged and hinge on a firm and faithful expectation that this long run is at hand, or is near, or will soon draw near…

“Back in late 2009 I thought that the liquidity-trap short run was likely to be a three-to-five-year phenomenon. It has now been six….The duration of the short run thus looks to me to be, this time, not three to five years but more like ten. Or more. The backward-propagation of the induction-unraveling of the short run under pressure of the healing rays of the long run Omega Point is not just not as strong as Marty Feldstein thought, is not just not as strong as I thought, it is nearly non-existent.”

But to me this does not seem like a surprise.

I’m not surprised by it partly because I’m pretty ambivalent about the quantity theory of money even as a long run concept, but partly also because I’m still back there with Keynes: when the Omega point is really distant, and the transition to it looks like it’s difficult and uncertain, it is very probably so far away that we will never get there at all. At least one thing, a tsunami or a new industry or a bout of irrational exuberance or depression, one thing at least will happen to us long before we reach that Omega point, and whatever it is will create a new storm on our ocean, and will shift the Omega point to some new position. Something will turn the hourglass upside down or knock it on its side, or tumble it end over end down a hill, or break the glass that forms it, or something, and preparing to whirl through the vortex to an imagined Omega point beneath us will do us no good when we’re sitting under a torrent of sand dropping on our heads from above, trying to bury us.

How likely is it that something will happen to interrupt our trip to the Fabled Economic Long Run? How stable and certain is the Omega point? My own view is that unless the Omega point really is “at hand, or near, or will soon draw near”, it’s not very certain at all. And what’s worse, it’s not uncertain in a way that’s easy to handle: it’s not just subject to some random variation around a long run expected value. It’s not stochastic. It’s unknown. We can prepare for it by gaining strengths that will be useful no matter what the future is. But we can’t rationally forecast it with a formula.

One example of this that I’ve used often is the World-Wide Web: in 1989 we could not possibly have predicted the dot-com bubble of just a few years later, because there was no dot-com start-up in existence in 1989. The Internet existed---the capability of sending data between computers. But there was no HTML, no JAVA, no Visual Basic; there was no such thing as a web app. There were none of the basic building blocks of modern e-commerce beyond the existence of the network itself. The creation of the real World Wide Web changed the way business was done, and left any prior vision of a long run Omega point that we might have had in 1989 floundering in the dust.

But that’s a one-time event, right? Surely that kind of thing doesn’t happen all the time; surely our longer run expectations are more secure in “ordinary” times than they were at that point, on the cusp of a transforming technology, before the first wave of a new and transforming industry. Right?

Let’s go back through a few decades to see what might have changed the Omega point in each of them. I’ll mention just what comes quickly to my mind, which means I’ll leave out a vast number of important things that don’t, and I don’t doubt that you’ll experience some frustration with my lists because I’ll leave out the very things that you think were most important. So just regard my lists as a start, as scratch lists, and feel free to add to them.

Imagine yourself not in 1989 but in 1999 trying to look at the long run, the Omega point over the next decade. What would you have forecast?

In the following decade, the 2000s, we had two new wars sucking away our national wealth, and the horrific events that preceded those wars. We had a Presidential election contested up to---and some say decided by---the Supreme Court. We had the Bush tax cuts early on, an immense housing bubble through much of the middle of the decade, and then the largest financial crisis since the great depression. We had the Tea Party, sequesters and fiscal cliffs. On the up side, the iPhone and iPad and all of their competitors hit the market, creating an industry that is still expanding, and after that we not only could order things from abstract stores without walls, we could do it from our hand held computers (our phones) while we sat on a park bench. Industry insiders may have expected each of those things, but most of us did not. YouTube, Facebook and Twitter all were founded and blossomed; and even industry insiders did not expect those, because there were no industry insiders in the new industry of social media. SpaceX was founded in 2002. In 2000 the Federal budget ran a significant surplus…remember that? Which the CBO projected would continue through the decade and wipe out the Federal debt. Alan Greenspan, the Ayn Rand acolyte and fiscally conservative Chairman of the Fed, went before Congress to warn them that the budget surplus was far too big, that we were paying off the national debt so fast that it was dangerous to our economic well being, and he then begged Congress to be more fiscally profligate. Mid-decade we had Hurricane Katrina that trashed New Orleans; in 2010 we had an earthquake that devastated Haiti. In 2004 there was a tsunami that pushed the Indian Ocean well inland across much of Southeast Asia. Oh…and of course, a Republican President requested, and Congress enacted, a $700 billion bank bailout, an amount that at the time seemed almost inconceivably huge, and in quick succession after that we elected the first black President in US history, and the new President asked for and received from Congress a $787 billion economic stimulus bill on top of the bank bailout. He also proposed, and Congress passed, a national health care bill that drove the Republican party to such frothy-lipped distraction that it would repeatedly bring the whole country to the brink of fiscal default by refusing to raise the ceiling on the debt that the CBO, at the start of the decade, had thought would shrink until it vanished.

How much of that did you predict in 1999?

For the 1990s we’ve already mentioned the emergence of the World Wide Web and the dot-com bubble. Amazon was founded in 1994. Web TV, Java, Google, and the first Gulf war. Clinton was impeached by the House, and then acquitted by the Senate. The Los Angeles riots in 1992. Did you predict all of that in 1989? Do you want to argue that those things had no impact on the long run Omega point?

For the 1980s we can point to the emergence of personal computers as a major industry; it had really started in the 1970s, but IBM took it to the big time with the first IBM PC in 1981. Those of you who are very young can’t begin to understand what a radical transformation that was. MS Dos emerged; the Apple Macintosh was marketed with the famous Super Bowl ad. At the end of the seventies there was a widespread fear that rapid inflation was built in to the system in a wage-price spiral, but a deep Fed-induced recession in the very early years of the 1980s killed inflation expectations by driving interest rates through the roof. Then we had “morning again in America” in the middle years, as soon as the Fed allowed it, and recession again at the end. In 1982 Israel invaded Lebanon. Reagan fired 13,000 air traffic controllers, which reputedly so damaged the labor unions in the United States that they have not really recovered since. Again, those of you who are too young to remember how things were before that event won’t really understand how transforming that act was, and how much it changed the economy we live in. Congress, with Reagan strong encouragement, reduced the top tax rate from 70% in 1979 to, for a time, 28% in 1986. Iran-Contra. Nicaragua. Oliver North sneaking secret documents out of the OEOB in his secretary’s undergarments, and his potted plant defending him at Congressional hearings.

Back another decade: what would you have predicted looking forward from 1969? The 1970s ended the Vietnam War in somewhat chaotic fashion; President Richard Nixon was impeached and resigned; in 1973 OPEC imposed an oil embargo that sacked the US economy in many ways. A Republican President imposed Wage and Price Controls, an almost Marxist intrusion of federal fingers into the operations of private markets. Crude oil prices rose from under $2 per barrel in 1970 to over $36 per barrel in 1980. $36 per barrel may sound cheap by modern standards, but think what an18-fold increase in the price of oil from its current level would do to our economy now---from the current roughly $60 per barrel to over $1000 per barrel. Think about that. Do you think that would have no impact on our long run expectations? Other seventies events: Apple computers, Atari computers, Visicalc, Ethernet and TCP/IP. Floppy disks, microprocessors, videocassette recorders, LCD screens. Word processors. Pong and the beginning of computer gaming.

Looking forward from 1959? In the sixties: lord---do we really have to do the sixties??? The riots, the civil rights movement, the anti-war movement---the Vietnam War itself? The whole suite of New Frontier and Great Society programs, including Medicare and Medicaid? Leaving the planet Earth, for the first time in history: we had barely left the atmosphere at the beginning of the decade, and by the end we had landed men on the moon. The event itself has not yet impacted any Omega point, but the process of getting there surely did. The Civil Rights Act, the Voting Rights Act. The assassinations of John Kennedy, Robert Kennedy, Martin Luther King, Malcolm X, the Birmingham church bombing, Medger Evers, Chaney, Goodman and Schwerner. Woodstock and Altemont.

And the fifties: the Interstate Highway System, the Korean war, the invention of the credit card, radial tires and the transistor radio, Cobol, Fortran and, of course, the births of Barbie and Mr. Potato Head. Sputnik and the start of the space race. The House Un-American Activities Committee, and McCarthy in the Senate.

Forties: Nazism, Pearl Harbor and all of WWII, the Marshall Plan, the entire south walking out of the Democratic National Convention and forming their own separate States Rights Democratic party. The beginning of the Cold War.

Thirties: New Deal, WPA, Great Depression, Social Security, the dust bowl, Hoover Dam, the Rural Electrification Administration and the Tennessee Valley Authority, and the publication of Keynes’ General Theory, which created modern macroeconomics, and also created a schism in the economic world that we have not yet resolved.

The point of all this is that if the Omega point is not too far away---if we’re fairly close to long run equilibrium---then its fire will warm us, and we will all react to it, and do our best to prepare for it. If it’s close it’s powerful on its own as our “long run” destination, but also powerfully affects our short-run behavior, because we really believe in it, we can feel it. But the farther it is in the future the less likely it is that we will ever get to whatever Omega point is pulling at us. It’s still a valid abstraction. It is still the direction that the economic fundamentals are now moving us, in some sense. But if the Omega point is a decade away, if too much has to happen to get us from here to there, then the odds are that a great deal of turbulence will intervene between now and that long run, and by the time it really could be at hand, or near, or soon draw near, by that time the Omega point that pulls at us will not be the one we see now. By that time the Omega point will have moved to a very different place. And I think most people can see that, and react as though they can see it. The distant Omega point does not warm us. It’s like a fire in another room, or even in another house.

One quick word about the Quantity Theory and the money supply, and I’ll stop. There seems to be a great deal of panic in some circles that the Fed has quadrupled the quantity of base money in the years since 2007. That is the source of Dr. Feldstein’s original bewilderment and DeLong’s comment about the price level being proportional to the monetary base when we at last reach the Omega point. But lost in this panic is the fact that the monetary base is never stationary: it doubles about every 10 years to accommodate a rising nominal GDP, and has been doing that for many decades. Yes, the base money supply has quadrupled from its level at the close of 2007, but it’s already been 8 years since then. The Fed will have to be alert, yes, and be ready to draw that supply down if it becomes necessary. But as time goes on the amount that will have to be drawn down dwindles. At that time, the Omega point time that DeLong sees in the future, the Fed’s scramble to “shrink its balance sheet to normal” may not seem impossible at all. If the Omega point is 12 more years away, the Fed has already accomplished the task: all it has to do is stop expanding, which, in fact, it is doing. The base money supply has held more or less steady for the last year.

Here’s the truth: the ocean is never ever flat. There are calmer times and more turbulent times, but it’s never flat. Even if the general economic models, the Keynesian short run and the classical long run, all capture real trends in our economic lives, and point to some economic destination that results from our policy choices, we can’t believe that ordinary economic actors will rationally treat that long run single-point destination as inevitable. In fact, to turn that phrase backwards, we can’t think that it would be rational for them to think of it as inevitable, particularly when the process of getting there will take time, and has to leap a few hurdles. Because, to abuse a phrase, the Omega point is just one damned thing, while real-world economies are one damned thing after another.

Mobility, politics, parties and Gerson

noreply@blogger.com (Stuart) — Sun, 31 May 2015 22:15:00 +0000

I have tried before to climb far enough out of my winter doldrums to write here again, and in fact I’ve written a dozen or so comments that I never posted. For some reason I think I want inspiration---so I wanted, for example, to respond to a fairly recent trend from Brad DeLong claiming, possibly to be controversial, that our national debt is too small for the twenty-first century. I like the idea of being contrary on this issue, but my response got very abstract, and so I never posted it. I think now that what I need to do is go back to the real stimulus that prompted most of my prior posts: not vaulting intellect, but plain old-fashioned irritation.

So I guess I’ll respond to something that irritated me from yesterday’s (Saturday’s) Washington Post op-ed page. Michael Gerson, probably my favorite Republican columnist, was talking about the two parties’ attitudes toward economic mobility and equality of opportunity. And in the process I think he managed to trivialize both sides of the debate: his point was that the emergence of economic mobility as a campaign issue is a compromise, of sorts, and that Democrats in general would rather talk about inequality (of final outcome), while Republicans would rather talk about growth. As he says it:

“When Democrats refer to stalled mobility, they are generally still talking about inequality. When Republicans embrace mobility, they often mean cutting taxes and reducing regulations.”

And he claims that to Democrats,

“the job of helping the poor is inseparable from cutting the 1 percent down to size.”

I’d actually reverse the causality in the first quote, and flatly deny the second. Because I think this is one of the areas where thinking conservatives and thinking liberals have the same very basic goal, and only differ in how to achieve it.

I think that when Republicans talk about growth they are really hoping that growth alone will create more opportunity, and more economic mobility. And if growth is widely distributed, rather than hoarded by the top 10%, they might be right. (I don’t agree with their belief that the best path to growth is through cutting taxes and reducing regulations, but that’s a different topic…)

And I think that when Democrats complain about inequality, they are most concerned that extreme inequality of wealth and income interferes with mobility and opportunity, which are the ultimate goals.

I can’t speak for all progressives, but for myself I can say that I really have no big emotional response to the lifestyles of the 0.1%. To me they are like Lectroids from Planet 10: they inhabiting a separate universe in a parallel dimension, and are unlikely to ever interact much with the rest of us. I care that most of the income growth of the last 35 years seems to have gravitated toward the top 10% of the population not because of any envy that they have it---why should I care what they have?---but because it leaves the rest of the population with stagnant incomes and declining opportunity.

And that is the whole of it.

This isn’t something I just made up in response to Mr. Gerson’s column. Here’s what I said in this post from over a year ago:

“the path to a more equal distribution of opportunity and more equal reward for work and talent may run through a more equal distribution of income, and … no amount of effort to provide opportunity can compensate for the disadvantage of being born into a poor family in a culture with extreme income inequality.”

Because

“opportunity is neither free nor distributed equally across the population. Those who begin with high family incomes can buy more of it, for themselves and for their children, than those who do not.”

What I didn’t say in that post is that the marginal value of money spent on opportunity declines pretty rapidly after a certain level is reached: once you have the opportunity to eat and sleep, to go to school and study in relative security, and attend college without crippling the rest of your life under the Kryptonite boulder of student loans, you’ve achieved a very great deal of what money spent on opportunity can buy. Yes, if your parents are 0.1-percenters, or even 1-percenters, you may be able to buy your way into elite schools and elite jobs, but those are the special opportunities on Planet 10, available only in a distant, alien dimension in the Hamptons. Let’s start with a wider distribution of just the basic opportunities back here on earth.

Gerson’s advice to Republicans is, at least at the start, exactly right, and it’s his ability to recognize things like this that makes him my favorite Republican columnist. He says that

“The entry-level commitment for Republicans in this debate is a recognition that equality of opportunity is not a natural state; it is a social and political achievement.”

Yes. It is a social, political and economic achievement that requires eternal vigilance, and that disappears when it is left unguarded. It takes a good deal of commitment, and (in this progressive’s view) strong government determined to maintain real opportunity, to achieve what Gerson says is

“America’s most urgent domestic priority: resisting the development of a class-based society in which birth equals destiny.”

But if the entry level commitment for Republicans is the admission that universal opportunity is something that the culture, and the country, must provide through effort, what is the conversation’s entry-level commitment for Democrats?

I’d suggest that it is the open recognition that the purpose of all of this discussion of income inequality is not to harm the rich, or resent the rich: it is to enable those below the top 10%, particularly the poor; it is to provide everyone with a real opportunity to pursue their own future with hope, and to make sure that everyone has what Elizabeth Warren has been calling a “fighting chance”.

Of course, even if each side can agree to start at their entry-level commitment, and we can agree that we all have a common goal of widespread opportunity, we still can’t hope for political agreement or policy progress. Because progressives don’t believe for a minute that tax cuts and deregulation, the policies of choice for the last 40 years under both Republicans and Democrats, will get us there; in fact, I would say that if there is a general agreement on anything about economic policy among progressives, it’s that the constant habits of tax cuts for the wealthy and deregulation for businesses are actively harming economic opportunity for the poor by diverting all economic reward upward (and harming economic growth by starving investment in infrastructure, research and education, and much else).

And conservatives, of course, are true believers in tax cuts and shrinking the government, and will accept no whisper of any other solution to any problem.

A picky, cranky, wonky blog post. Nice cloudy, cool afternoon, though.

noreply@blogger.com (Stuart) — Mon, 29 Dec 2014 21:01:00 +0000

I had leave time to burn up at the end of the year, so I’m still home and at my leisure on the Monday after Christmas, looking out my window at a beautiful drizzly gray day So it’s curious and a little discordant that I’m slightly bugged about something. And it bugs me that I’m bugged. And what’s more, it bugs me that being bugged about this bugs me.

I’ve just read a Center on Budget and Policy Priorities report by Dean Baker, part of a more general CBPP discussion on full employment, in which I encountered a use of accounting that I think is just wrong, and for which I’ve chastised others. To be clear, I agree with almost everything in the Baker paper; I almost always like Dean Baker’s posts and papers. He’s one of the economists I go to when I find myself adrift and want a quick whack of reality. And this paper is saying some very basic, very true stuff. I agree with his premise, which is that the level of employment and the wage rate for workers in the United States would both improve if we could reduce or eliminate our trade deficit. I agree with his primary conclusions, which are first, that the most direct and best way to do that is to reduce the value of the dollar against the currencies of our trading partners, and second that this is going to be politically difficult to do because there are a lot of vested interests against it. And I agree even with his secondary conclusion, which is that the most obvious way to counter a large trade-deficit depressant is with a large budget-deficit stimulus.

But along the way he uses accounting identities in a way that I think is misguided, and that seems to me to imply a misunderstanding of the word “identity”. I know I have to be wrong about this, because almost every economist alive and most of the smartest economists in history seem to do the same thing that Baker does in this paper. But the process he uses seems dangerous to me; if it’s accepted it seems to me as though we can prove a lot of things that are completely false, and that can lead us to harmful policy choices. And for the life of me, I can’t figure out why I’m wrong, and why what he does is reasonable. Please, if you know where my mistake is, write a comment.

Here’s what he does that crosses my eyes. (I’m going to write these things so they look like algebra, but what they are really is just columns of figures that are summed---there’s nothing abstract or mysterious here, and nothing terribly mathematical. This is accounting, not fluid dynamics.) He lays out the usual absolutely elementary macro equations, starting with the first and foremost, which is precisely table 1 (or more specifically, table 1.1.5) from the National Income and Product Accounts:

(English translation: total national income, Y, is the sum of income from the sale of consumer goods C, the sale of investment goods I, sale of goods and services to the government G, and net export sales, meaning exports minus imports. In the NIPAs those are all the recognized sources of income---and the result of this sum is generally reported as GDP.)

So far so good. I like that part. It’s unassailable. In fact it should be written like this:

Which makes it clear that this isn’t an accidental equality, not an equilibrium point that we’re trying to achieve: Y, national income, is defined to be the sum of the incomes received from all sources. We measure all the variables on the right, and then we calculate Y by adding them up. I want to emphasize this, because somehow everyone appears to lose sight of this about identities. These accounts are tables; Y is the thing that appears at the bottom where you write “total”. (The NIPA table puts it at the top just to confuse everyone.) So no matter what the values on the right side of this equation do, the equation is always true, because Y is always just the sum of all the other variables. If all the other variables magically double in an instant, the only result in the accounts is that Y doubles too.

Having said that, I should hasten to add that there might be real world constraints that make it impossible for all the other variables to double at once; we have limited resources, limited existing plant and equipment, a limited population of workers. But the constraints are in the world, not in the fact that this is an accounting identity.

Then Baker offers the other half of the equation we all saw the first day of macro-econ class:

Which actually doesn’t directly show up in quite that simplified form anywhere in the NIPAs. It’s there, but is pretty spread out through the other tables. I leave the equality sign as it is because this isn’t the definition of income. It is the definition of something else, but I’ll come to that in a moment.

Then he rearranges these two equations this way:

This follows by simple algebra from the equations above, and it gathers the accounts into groupings that we read about all the time in the news. The first term in parentheses is the trade surplus, and the last term in parentheses is the government budget surplus; both of these have been significantly negative in recent years, so they’re usually called deficits---the trade deficit and the budget deficit. But my eyes are already beginning to cross, because it seems to me that this form already implies a bit of misdirection. Because with this as a basis he tries to show that the X-M term, the trade deficit, somehow pushes around the T-G term, the budget deficit. Here’s how he starts:

“Let’s imagine for a moment that…all of the private sector’s savings is devoted to private sector investments.”

Now, why would we imagine such a thing? More later on this, because this particular imagined equality is a very common motif in economics, and one with a long history, but let’s follow the logic here first. Clearly he wants to say that the term (S-I) is zero, or at least fixed, so any change in (X-M) must be matched by an identical change in (T-G) in order to maintain this “identity”. Voila! The trade deficit creates a corresponding government budget deficit.

The trouble with this argument is that we don’t get to specify what is fixed and what is not in this accounting equation. At least not due to the accounting. Because the second equation up there, the other half of the basic-macro-class lesson, should be written something like this:

and substituting for Y in this, we can restate Baker’s equation above like this:

But the accounts only specify that S will change when the other variables change, not that the other variables must bear any specific relationship to each other. Because savings is just whatever is left over after all expenditures are taken out of current income. It’s what you would put at the bottom of the column of figures and call something like “net income” or “residual income”. The NIPA accounts don’t see it as something we do, or a decision we make, it’s just the final result, the difference. As far as I can recall without actually looking it up, there are only two kinds of things the NIPAs just define from their internal arithmetic: totals like Y, or residuals like S. In fact all the totals are some variation of Y (GDP, GNP, NDP, NNP, etc), and all the residuals are some variety of S (corporate retained earnings, household savings, government surplus, etc.)

(A quick aside---notice that in the equation above, income is represented by I, G and X---income from selling investment goods, selling goods and services to the government, and selling goods and services abroad---and the subtractions are only T, taxes, and M, expenditures to sellers outside the country. Why aren’t other expenditures included? Because my expenditure is your income: every purchase from a domestic supplier subtracts that income from the purchaser’s account, but adds it to the seller’s account. Total national savings doesn’t change.)

To be fair, I’m certain that Baker knows all of this very well; better than I do, I’m sure, since he gets to do this stuff all the time, and I can usually only do it in the evenings after work. He knows that he needs some additional arguments outside the accounts to justify any relationship he asserts between the variables, and he’s careful later to specify that the trade-off between government deficit and trade deficit is implied only if we want to maintain full employment. But the accounting sleight of hand is there, whether he really believes in it or not, even if he’s just using it as a way to introduce his topic.

My point is that the belief that the trade and budget deficits are linked may be true, but it can’t be drawn as a conclusion from the accounting equation alone. This may sound picky, but it matters; if we accept this logical process of using the accounting identity as a forcing economic function as valid then it would be possible to create a claim, from the accounting identity, that any one of the variables is “forcing” a change in any other. Just fix everything else by assumption, and danged if the variables you have in mind aren’t the only ones that change! For example, let’s go with Baker’s assumption that S-I is fixed, or at least very sticky, and then assume that we’ve passed a balanced budget amendment so that the government deficit is always zero. Then we have proved, from the accounting identity---haven’t we?---that any change in exports must always and instantly be matched by an exactly equal change in imports, and in the same direction. If exports increase, then imports, by this logic, would also increase by an identical amount. How on earth would that happen? In any short run, I don’t have any idea. It pretty much violates the usual views of how exports and imports change in the short run; they generally change in opposite directions due to a change in exchange rates. But if we were allowed to fix everything else in the accounting identity above, it would have to be true.

I said above that this process of thought is dangerous. Here’s why. This kind of argument is very familiar; it’s exactly the kind of argument that makes people claim that budget deficits “crowd out” investment due to this same accounting identity. To make that argument, you would rearrange the terms like this:

Then the “crowding-out” crowd would say, “Let’s imagine that the trade deficit (X-M) is fixed and savings S is fixed---then an increase in the budget deficit (G-T) must come out of investment! Where else could it come from? Those are the only two things we are allowing to change. If all the other variables are fixed, how else can the equality, the identity, be maintained?”

But as I explained above, within the accounting we don’t get to decide what variables are fixed. If we declare that any are fixed, or that there are relationships among them we have to add behavioral equations or other forces outside the accounting framework to explain those things. The crowding out argument doesn’t get to say that S is fixed, unless they can show some reason that it should be: as we saw above, within the accounts S is whatever it needs to be to balance the equations; it is just the difference between income and outflow.

And what’s unfortunate in this case is that everything Baker needed to make his argument is in the first equation right at the top. We have to add a “full employment” level of Y to get there, like this:

Where Y-hat is a fixed goal, full employment income, and to get Y to equality with Y-hat, the other variables have to be prodded into line. If the trade deficit (X-M) gets “bigger” (more negative, but bigger in absolute value), then one or more of the variables on the right must be made to grow, not because the accounting says so, but in order to satisfy our desire to achieve the fixed Y-hat goal. This is straightforward demand management, which is where Baker was really going. It’s where he did go, in fact. But he could have stated that at the outset, and then proceeded to discuss how we could make the other variables cooperate with our goal. There are alternatives. For example: we could simply have the government spend more (increase G directly), but we have to take into account what that increase in income from a low Y might do to consumption or investment---as a matter of behavioral response, both of those might depend on total level of income. Or we could decrease taxes, and depending on how we do that our action might increase investment, or consumption, or both.

Or we could do what Baker is suggesting: try to lower the value of the dollar, so that we export more and import less, and the increase in net exports helps to push our domestic income toward full employment....

The comment on S=I that I promised will wait until another post. It’s time to take a walk in the cool afternoon, and start thinking about what to make for dinner.

Plaid butterflies and other political visions

noreply@blogger.com (Stuart) — Sun, 09 Nov 2014 15:28:00 +0000

Like all good liberals I’ve been in mourning for the last few days. I thought I was recovering, but I guess not. So even though I generally try to stay largely rantless, I’ll allow myself this one rant as therapy.

“Still in mourning” may not be quite right; it’s more that I’m still very concerned about what may happen in the next few years. In fact I’m uncomfortable about some of the early things we’re already hearing from the new majority in the Senate---Mitch McConnell saying, for example, that if Obama uses his legal authority as President to do anything sensible about immigration that would be like “waving a red flag in front of a bull” to the newly elected Senators. I’m shaking my head in utter flabbergastion, if that’s a word: Senator McConnell, what, exactly, has not been a red flag to Republicans over the last 6 years? Your entire careers have been built on purple-faced rage, spittle-filled bellows and gnashing teeth. If Obama bent over and kissed your---um, feet---that would be a red flag to you. Why is it, Mr. McConnell, that Obama always has to please you, whether you win the election in 2010 or 2014, or lose it in 2008 or 2012? Why do you never have to worry about waving red flags in front of the rest of us, which you do constantly?

And there was a letter to the editor in the Washington Post yesterday, wondering if this election would mean we could come to some kind of “compromise” on the Keystone XL Pipeline. What did this letter writer have in mind? This is basically a binary decision, yes or no. Build it or don’t. What does a binary “compromise” look like? Is he suggesting that we build half of the pipeline? Perhaps we should build segments in alternating states---maybe build the segments through Montana, Nebraska and Oklahoma, and leave out the segments through Texas, Kansas and South Dakota? Or maybe he’s thinking the Republicans will offer something the Democrats want in return for building the full pipeline. What is he thinking the Republicans are likely to offer? My guess is: nothing. To Republicans, nothing but complete collapse from the other side is acceptable, and real compromise is not an option they will consider.

Frankly, I do expect the pipeline to be approved. Obama has been waffling on it for years, which means that he won’t fight against approval when Congress sends that bill to his desk. So the Post’s letter-writer will get his way: Obama will accept a Republican-style one-sided “compromise” on the pipeline, and get nothing in return.

Of course what bothers me most is my expectations about what a Congress dominated by modern Republicans will do to the economy, and to government. I expect them to decimate both. Their economic beliefs seem to me to be so wrong-headed, so blind, that they will almost inevitably blunder us into a new recession. The Fed is looking forward to raising interest rates next year, because they expect that we are finally returning to what they think of as a normal, fully employed economy. I think that would be a little optimistic even if we did not have this group of budget-slashers about to take control of the Senate. The next round of sequester budget cuts are to be enforced in January, and I expect the Republicans to insist on them---except, of course, for defense spending, where they will want sequester relief. I expect Obama to accept this “compromise” as well, since his inner heart has always tended toward fiscal hawk, and that dose of austerity will slow what looks like a still meager recovery. And of course we will face a new round of debt-ceiling negotiations somewhere around next March. So my hazy expectation is that by the end of next year the steady fall in the unemployment rate may have stalled. The numbers will still be much better than they were two years ago, so it won’t cause panic. But by the middle of 2016, after the full impact of a new Republican budget, we may be where Europe is now: stalled completely and facing a possible new recession. The Fed’s hopes for a “normal” economy, where they can once again use a positive interest rate to restrain corporate investment exuberance in excess of our potential production limits, may be gone.

That’s what I expect, to be honest. But I may be wrong. I hope I am. In 2008 a large number of conservative economists made terrible predictions about what would happen if the Fed continued with monetary stimulus too long, or if we tried a fiscal stimulus. They predicted soaring interest rates and inflation. They were wrong, or at least they have been wrong so far, but I believe they were sincere in their beliefs. Like Yogi Berra said, “predictions are tough, especially about the future.” And these expectations I have are really no more than mood right now; I haven’t even done so much as a back-of-the-envelope calculation. We don’t yet know what the Republican budget will really be, so we have no basis for a calculation even as rough as that.

So maybe, hopefully, my predictions are wrong too. Maybe the recovery is stronger than it seems. Maybe it’s truly robust, a surging tide that can’t be stopped. Maybe the new Republican Senate will want real compromise, rather than one-sided collapse from Democrats. Maybe their budget cutting zeal has been sated, at least a little, by sequester and all the rest, and they will pass budgets that actually get things done. Maybe the whole capital will soar into the blue, blue sky carried by a flock of paisley butterflies.

But it will be entertaining to watch the Senate struggling with the inevitable Ted Cruz bill to repeal Obamacare. In order to pass it they need 60 votes, unless they eliminate the need for cloture---in effect, eliminate the filibuster in the Senate, by some parliamentary maneuver, for this bill. But if it’s possible for this majority to do that for this bill, it’s possible for any majority in the future to do it for any bill. McConnell is not so blind that he can’t see the danger for himself, and for his own party, in that. At least maybe he’s not. And maybe he can control Ted Cruz and the rest of the Senate Republicans.

Maybe the butterflies will be plaid.

Malala Cakeonomics

noreply@blogger.com (Stuart) — Mon, 03 Nov 2014 01:43:00 +0000

So. This is supposed to be an economics blog, so I promised to turn yesterday's cake into economics somehow. What on earth are the economics of cake? Well, let’s see. Actually, there are a lot of directions I could go with this, but I think I’ll write about a topic that I’ve been meaning to talk about anyway: the problems with GDP as a measure of economic production. These are all well known, but they get buried in the political fluff that passes for front-page news these days, and even economists generally just dismiss them and continue to uncritically treat GDP as the whole truth in discussions. I do it too. And GDP is the best measure we have. But it’s wrong, or at least incomplete. So how do we get to that from cake?

To start with, we need to notice that the cake we’re talking about is not just cake, but cake made from scratch at home. That gives us an excuse to get into the issue household non-market production by observing that rather than buy a cake ready-made, I produced a cake from raw materials that I bought from a relevant input supply vendor---that is, from a grocery store. We could notice that a huge fraction of the production of any nation takes place like this, by households buying raw materials and performing the final production tasks themselves, and that production inside the household, which is really the basics of everyday life, never shows up in the GDP. How much this matters is hard to measure; here’s a Bureau of Economic Analysis (BEA) study on it that reports on a number of different attempted measures of household production in the United States, and finds that the estimated value of that household production is somewhere between 12% and 58% as high as the measured value of market based GDP (see section 8, particularly the top of p.9). That's a lot: GDP is around $17.5 trillion this year. The lower figure is what we get if work in the house is valued at the minimum wage; the higher figure is what we get if household work is valued at the average hourly wage of professionals doing the same kind of work---in the case of my cake, for example, chefs or professional bakers. But in either case, that means that the measured GDP that’s reported in the newspapers is actually pretty far off from the real total product of our nation. And having observed that fact, we could take one more step and observe that not only GDP but also measures of economic growth are impacted by this, because some measured economic growth might result from simply moving existing production from households into the market economy: the same amount of production takes place, but what used to be invisible is suddenly revealed to the National Income and Product Accounts. That’s what would have happened if I had gone out to buy a cake on the market instead of making one at home.

The proportion of total production that takes place within households, rather than in the market, varies widely across cultures and countries, which is one reason you might want to take strange statements like “the average Ziltonian peasant lives on $3 a year”, or whatever, with a very, very big grain---maybe a boulder---of salt. What it really means is that the average Ziltonian peasant lives almost entirely outside the market economy: he hunts, farms, gathers, builds, makes his own tools, cooks and so on without buying much of anything from a store.

And that’s just the economics of what did happen. But here’s something that could have happened but, in my house in this instance, didn’t. As an inexperienced cake maker, I could have made some horrible mistake. I could have gotten my tie tangled in the egg beater, and in the resulting chaos of physics ended up with an injury that induced a trip to the emergency room. Or I could have forgotten the cake until my smoke alarm alerted the local fire department, and caused them to send fire trucks to my house. Or I could have actually started a fire that burned down my house with all that’s in it. In every one of these cases the GDP would record the response from the market---my treatment at the emergency room, the construction of a new house, the cost of sending a fire truck and all manner of emergency responders to my house---as a positive thing, an increase in the GDP. They are all things the market did, products the market provided. But none of the losses would have shown up in the GDP at all. Think about that a bit: wherever there is destruction, the GDP records the replacement of whatever was lost, but does not deduct the loss itself. A hurricane, a volcano, even an accident on the highway, all add to the GDP. But they aren’t the kind of thing we think of as an improvement in our lives.

I have a book to recommend on this if you’re interested in the topic: Mis-Measuring our Lives, edited by Joseph Stiglitz, Amartya Sen and Jean-Paul Fitoussi, with a introduction by Nicolas Sarkozy---yep, that’s right, the former President of France. Here’s a quote from that introduction:

“We have wound up mistaking our representations of wealth for the wealth itself, and our representations of reality for the reality itself…We have built a cult of data, and are now enclosed within.”

It’s a little overstated, perhaps, but he’s a politician and should be forgiven for drama. It’s basically true. And it’s good to constantly keep in mind not just that our data misrepresents reality, but how: that among other flaws with the GDP is the flaw that omits our “leisure” time (the time we spend pursuing our own goals, or with friends or family), our household work, our hobbies; these are simply not counted, but they are important parts of our real economic product. And the repair of our disasters are counted as adding to economic good, rather than simply restoring what was lost. And finally, a corollary of the last point, is that damage that is done and never repaired---like environmental damage from smokestacks or car exhaust---are never subtracted from the value of the market processes that produce them.

Ok. Finally, I can’t ignore this. I know this recipe is not just homemade cake, it’s homemade Malala cake, and the issue she’s known for is not the household production function, but women’s right to education. So in keeping, perhaps, with Ms. Yousafzai’s focus on women, I should point out that a very big fraction of household production is performed by women---how big varies across countries and cultures and is just as hard to measure, and for the same reasons, as the total amount of household production, but at least in the United States two-thirds seems like a reasonable first rough guess from Table 2 of the BEA study linked above.

On the issue of women’s education, or more generally, gender differences in education around the world---that would take a book to explore, not a blog post, and it’s not a topic on which I have any expertise at all. I’ll leave the explanation of that topic to Malala. But here’s a starter book: the UNESCO Atlas of Gender Equality in Education. This is a very accessible book, mostly graphics showing various comparisons, and the problems it depicts are not always those faced by young women: some are problems faced by young men. From the book:

“An important theme is that although girls are still disadvantaged in terms of access to education in many countries and regions, they tend to persist and perform at higher rates than boys once they do make it into the education system. Another theme is that all countries face gender equality issues of some sort, including situations where boys are disadvantaged in one way or another.”

Why is this education issue in an economics blog? Well, because it’s my blog and I can put whatever I want in it. But it shouldn’t take a lot of thought to realize that any nation that simply refuses to educate a significant part of its population, or mis-educates them, or damages their ability to learn by pushing them into classrooms that don’t suit their natures or capabilities, or educates them and then under-employs that education---any nation that does those things is seriously hampering its prospects for economic growth.

But that’s a blog post for another day.

Malala Cake

noreply@blogger.com (Stuart) — Sat, 01 Nov 2014 23:16:00 +0000

Ok, so this is the agenda for this post: A) Cake excuses, B) a recipe for Malala cake so far, such as it is, and C) Cake economics.

Yep, you read that right. Malala cake. That’s my story, and I’m sticking to it.

Cake excuses:

The 2014 Nobel Peace Prize was shared by Malala Yousafzai and Kalish Satyarthi. I had never heard of Mr. Satyarthi, but I knew about Malala, and I was so charmed and so uplifted by the fact that she won the Nobel Peace Prize at the age of 17 that I pulled over to the side of the road---I was on my way to work in the morning---and sat there for a few minutes smiling. I called my wife to share the good feeling.

Malala herself says that she doesn’t deserve the prize, but if other people in the world had a reaction anything like mine it may not matter whether she deserved it: the fact that she was awarded it brought a lot of gladness into the world, and that may be enough justification. And while I understand her reluctance to accept a prize before she’s succeeded in achieving her goal, I don’t agree with her on this: she does deserve it. She is a startling example of why those of us who have become older, and in the process have become jaded, tired, and bruised by life, need in the end to pass the torch to others who are still young, still eager, and filled with hope for the future of the world.

So I decided to make a cake for Malala.

That’s really a pretty odd response for me. I don’t usually like cakes very much. I rarely eat them, and I have no particular skill in making them. I generally find the cake part too clingy and the frosting too sweet.

Celebrations are generally cake-events, though, so I was stuck. I had to bake a cake. But I have a problem here: since I don’t generally make cakes, I don’t have a go-to cake recipe to pull out for special occasions. I can never follow recipes anyway. I mean, I guess I could follow recipes if I really had to, but usually if I’m going to spend time in a kitchen I figure I might as well spice up my time with at least a little bit of adventure.

So by deciding to make a cake, I had sort of decided to invent a cake.

I had to do some research on cakes, but I know where to start any research project: Google. I looked up a lot of cake recipes, took a bit from here and a bit from there, and added some flavors that seemed to me in my cake ignorance to be very distantly appropriate, and invented my cake. It didn’t occur to me until much later that maybe I should put it out here on my blog, partly to see if anyone has suggestions, and partly as an invitation to my friends to come over and try some while it lasts. I wanted to wait until it was perfect but---well, that would have been a long time, I think.

And then I read that Malala had donated all of her prize money to rebuild schools in Gaza.

I can’t wait for perfection. That much youthful altruism has to be celebrated now.

The recipe is below giving you all the extremely small benefit of what little cake expertise I’ve managed so far.

The cake:

I’ve made this cake three times now, with slightly different methods each time. Every time the cake fell after it got out of the oven---not drastically, but it did fall. It still tasted great, and the texture was acceptable, but it didn’t manage the lightness I had intended. So, back to the web to figure that out. After some effort and research I discovered that flourless, egg-risen cakes like this one are kind of thermally monogamous; their instinct is to mate for life with whatever temperature they’re with at any moment. It’s not that they can’t change. But they become attached to their temperature of the moment and are reluctant to abandon the relationship even when they know it’s not good for them in the long run. Unless they are treated gently they’re not at all comfortable moving to something thermally new to them. For example, when the cake is done baking in a hot oven, don’t just yank it out and put it someplace cool: it’s guaranteed to sulk about that. The cake knows that if it remains in that high oven heat it will eventually become charcoal, but it still has to be gently coaxed to leave. Turn the oven off and leave the oven door ajar for a few minutes to let it get used to the idea of moving on. Then open the oven door wider, and leave the cake for another few minutes. Then, when you think it’s ready, take it from the oven and put it on top of the stove where it’s warm from the air released from the oven below it, and let it cool there for a while before moving the whole thing to a wire rack. Your kitchen might be arranged differently, but you get the idea: slowly cajole the cake, one step at a time, to accept the new temperature.

In a way, this starts even before you even start mixing the batter: take the eggs and butter out of the refrigerator half an hour ahead of time, so that they are warmish when you start.

Here’s what I did, which I guess I should call a recipe.

(your name here)’s Malala Cake:

So I called mine Stuart’s Malala Cake because it’s a cake and I’m Stuart and I made the cake, but I don’t feel all that possessive about it; if you are like me and can’t stop tinkering around with things, come up with a variation and call it your own Malala cake. You could put flaked almonds on top. Or you could use marmalade instead of apricot jam, then you could call it marmalade Malala cake, which is not only charmingly alliterative, it actually sounds pretty tasty…I may have to try that. But here’s my version, so far.

Ingredients:

5 eggs, separated

2 Tbsp lemon zest

1 Tbsp lemon juice

1/2 teaspoon ground cardamom

1/8 teaspoon ground coriander

pinch cinnamon

¼ cup raw cane sugar (because I like it better---it has a hint of molasses flavor),

¼ cup refined sugar (for the egg whites---dissolves better)

¾ cup almond flour

¾ cup almond meal

1 teaspoon baking powder

2 teaspoon vanilla

1 teaspoon almond extract

Pinch of salt

Prep:

Separate eggs into yolks and whites.

Preheat the oven to 350°F.

Place a round of parchment paper on the bottom of a 9-inch springform pan, and grease it and the sides of the pan with butter.

In a large bowl, beat together the egg yolks, lemon zest, and 1/4 cup raw cane sugar and the vanilla and almond extract until good and thick.

In a separate bowl, whisk together the nut flour, nut meal, spices, baking powder and salt.

Beat the egg whites to fairly stiff peaks, but don’t keep beating beyond that. As the egg whites begin to increase in volume, gradually sprinkle in the ¼ cup of refined sugar and the 1 Tbsp of lemon juice into them. This last, lemon juice, is experimental; I read on the internet (here) that an acid like vinegar, lemon juice or cream of tartar helps maintain the loft of beaten egg whites. It’s worth a try.

Assembly:

Add the nut flour mixture to the egg yolk mixture and beat until smooth.

Fold the beaten egg whites into the almond mixture a third or so a time. The first third can be mixed pretty vigorously; it’s basic purpose is to make the batter more liquid so that it’s easier to fold the rest of the egg whites into it. Be a bit more gentle with the second third, trying to make the result pretty fluffy and light. The last third should be folded in quite gently, just until incorporated and no more, to blend but to still preserve the lightness and airiness of the beaten egg whites as much as possible.

Gently pour the batter into the prepared springform pan and place in the oven. Bake for 40-50 minutes. It will be dark on top, don't let that scare you.

Remove from the oven gradually (see above) and let it mostly cool. If necessary---it probably won’t be, because the cake will probably retract slightly from the side of the pan on its own---but if necessary, run a sharp knife around the edge of the cake to help separate it from the side of the pan.

Release the springform pan side, and gently move the cake (on parchment) to a serving plate.

For the soaking liquid or glaze:

Put ½ cup of really good apricot jam into a pan, and heat together with ¼ cup Cointreau, if desired. If you’re really trying to make it for a 17 year old Muslim girl, you might want to use something non-alcoholic instead (maybe orange juice). That’s it. Heat until it dissolves. While it’s warm it should be pretty liquid. Let the hot dissipate from everything, both cake and glaze, and pour the slightly warm glaze over the slightly warm cake. Brush some of the glaze around the sides of the cake too, just to make it shiny.

That’s the cake I made. As I said, I’m not an accomplished cake maker, and this cake tends to fall a bit. If any bakers out there reading this, anyone who is actually good at cakes and wants to explain how I should have done it in the first place, I would honestly appreciate that. Just go to the bottom of the blog post and click on the tiny print that says “comments”, or if you’re the first one here it will say “no comments”. Or alternatively, you can go to the very top, to the title of this post, where it says “Malala Cake”, click on that, and then scroll down to the bottom and there should be a place for you to enter any suggestions you have. I’d like to get this right.

Cake economics:

Naahhh…I’ll do that tomorrow. Instead of economics, I’ll use this space to ask any of you out there who know Malala, or who have the chance to meet her somewhere, to thank her for me for inspiring me to make a cake. It turned out pretty well, to my nearly unbounded surprise.

And tell her also that she does deserve the prize. Alfred Nobel’s will says the prize should go to “the person who shall have done the most or the best work for fraternity between nations, the abolition or reduction of standing armies and for the holding and promotion of peace congresses.” It doesn’t’ say the winner has to have actually achieved peace forever. The purpose of this prize is not just to celebrate already accomplished goals: it’s to inspire the world toward peace, and to celebrate people who are pressing the world toward peace instead of conflict.

I said something at the top of this post about the older among us being wounded by life, and the young being eager and hopeful. I don’t really know whether that’s always true; there are counterexamples. Ghandi, who never did win the Peace Prize because he was killed the year they were probably going to award it to him, and Mandela, and Mother Theresa. They all managed to save some hope well into old age, and all of them were plentifully bruised by life. And there are some young people who are filled with other things than hope: bitterness, or anger. But Malala, in spite of living through a terrible assault, is not bitter, and not angry. She was young, and strong, and would not allow bitterness to deflect her. So I don't know. But there’s any truth to the idea that the young are more resiliently idealistic than the rest of us, please tell Malala that I hope she stays eager, stays hopeful, and stays young forever.

Nessun Dorma Part 2

noreply@blogger.com (Stuart) — Fri, 17 Oct 2014 01:04:00 +0000

A few days ago there was a review by Steven Pearlstein of several books, one of which, “We Are Better Than This” by Edward D. Kleinbard, I have already ordered from Amazon because of this quote in the Pearlstein review:

“Both our native talents and our good fortune are distributed through processes that we cannot fathom and do not ‘earn.’ Our loud proclamations that what we take from the market is our just deserts is just noise made against the darkness, trying to still the voice inside that asks, why me and not them?”

Yes!! Exactly.

In my last post I wrote about the limits of information, the fact that because information is widely distributed and always changing, and because human beings are constantly striving and pushing and working toward their own ends, unexpected and unpredictable change is not the rare departure, the “exogenous shock”, that is envisioned by modern model-bound economists, but instead is the steady, constant economic norm. Because of this shoving and pushing we can’t really make long run economic forecasts, and that the agents in our models cannot predict the future any better than we can. They can’t know their own futures with any security: all of what I called the “the restless magma of human dedication” is bubbling under them, and it can bury them or it can push them to great heights. They can’t really know which it will be. They have to live their lives to find out.

And that should form at least part of the ground on which our economic models stand; the agents in our models should not be rational agents who trade present against a simplistic future in which all possible outcomes are known to them well enough to attach probabilities to each, because in the real world all possible out comes are not known at all, to anyone, and in small or large ways the future will always be something we haven’t even imagined until it gets here. I don’t know how to create models like that, but if we want our economic models to depict the way the real world works it has to be done.

And that brings us to a dangling thread that needs to be tied up from my last post. It ended with the sense that economic models can’t be used to forecast very far into the future. So we might ask: what good are they? What are they for? And this relates to a question that I have to answer from time to time, when I admit in some social setting that I do sometimes read the economic blogs. People ask: what are they forecasting, what are they saying will happen? Because, of course, that’s what everyone really wants to know, probably because it’s what no one actually can know. And I have to tell them: they aren’t. The economics blogs, and economists in general, usually don’t make forecasts. Oh, just before the release of some new economic statistic, they’ll play the forecast game about what the new release will say---but that’s actually “forecasting” what has already happened, which is what those statistics report.

So if economists don’t forecast the long run, except for those few courageous people who make their living doing nothing else, what on earth do they do? Why study economics at all?

The answer, I think, is that that we create economic models for at least three purposes. First, We should recognize that our simple models are parables only, and like any parables they present basic ideas to help us understand the world we find ourselves living in, as humanity has tried to do for thousands of years. They help us know how people are able to work together, in a sense as cooperative strangers, in a country or in a culture, or on a planet, to provide (or fail to provide) a good standard of living for everyone. Perfect competition doesn’t exist in the real world, but understanding how it would work tells us some very powerful things about some of the forces that act on us and around us. Second, models help us figure out the less obvious implications of assumptions we make, or simple things we believe to be true: by embedding those assertions in mathematics, and in models, we can derive implications that we would never find by just contemplating the assertions on their own. And third, while we may not know what the long run future will be we know what the present is and what the recent past has been. We can, if we are successful in understanding something about how the world works, still make strong arguments about what will make the near future in some way better, and even what will make the more distant future better or keep it from getting worse, no matter what its exact features will be. We can do this in the same way that we can say that providing oil will make your car last longer and run better, but adding too much oil can damage seals. I can’t really forecast what will happen to your car in the future. You might run over a nail, or get a dent in a parking lot, or there might be some deeper mechanical problem waiting to emerge next week or next month or next year. But I can make conditional predictions about the impact that certain actions might have: put oil in, or the situation will get worse; don’t put in too much or the situation will get worse in a different way. Similarly in economics we can make conditional forecasts: policy X will have impact Y. In my view, stimulus will stimulate, which may be good or bad depending on the situation (stimulus during a boom is bad; stimulus in a recession is good). Austerity will depress, which may be good or bad depending on your situation. Investing in infrastructure will make the future economy more affluent, in part by making future businesses more productive and perhaps even more profitable. In making these predictions about the impact of various policy actions, simple economic models help if they depict something true about the world. And if they depict something false, they may mislead us into policy actions that are dangerous, or outright harmful. That’s why there are so many arguments about the foundations of economic theory: it matters, and our future welfare depends on finding simple models that are true, and avoiding simple models that are false.

And similarly, in each “agent’s” life, he or she has to accept the fact that his or her future can’t be known exactly, and that the farther away the future period is they’re looking at the less can possibly be known about it. But we do all care about the future, and so the agent in our models still has to make choices about actions in the present that may impact the unknown and unknowable future. So the agents have to decide what they believe about the future, and they have to decide what present actions will give them the best chance to prosper, or at least survive. We may not know what the future will be, but we know we’ll have more flexibility to deal with it if our debts are all paid and current, and if we’ve saved something. We will be better able to deal with whatever comes along if we are more educated, or we have good friends and a strong family to help us through, than if we aren’t or don’t.

But no one makes present decisions based on any real knowledge of what their taxes will be in some imagined distant future. They have no idea what their taxes will be, partly because they have no idea what their income will be in that future, and they have no idea what the whole country’s income will be either: their share of future taxes will depend on both. People save to give themselves a better future, period. It makes no sense to build a simple economic model, as, for example, the modern version of Ricardian Equivalence does, that assumes that people save today in order to pay taxes in the future, taxes that they can’t know will ever be imposed, and can’t know, even if the taxes are imposed, what portion of those taxes will fall on them. That is a simple model that seems to me to be false, and so I think that depending on it will lead us to national actions that might cause actual damage to the future we are trying to achieve.

I once read an interview with a multimillionaire who (of course) was asked how others could achieve wealth. His very honest response was: “I don’t know”. But later he did amend that. He said something like this: “Save your money. Everyone gets a couple of opportunities in their life. If you have money saved you have one more tool you can use to pursue an opportunity when it comes. Who knows? It might succeed, and make you richer than you are.”

Doesn’t that sound more like the life we all lead than the models that assume we all can calculate our expected futures with mathematical precision?

Nessun Dorma

noreply@blogger.com (Stuart) — Sat, 11 Oct 2014 01:50:00 +0000

This post will be long, partly wonkish, and partly just odd. I have to work up a little courage to write this, because in a way it’s a minor assault on the dominant economic paradigms of recent decades.

I’ve been trying to figure out how to comment on a quick exchange that took place a few weeks ago that included blog posts by Mark Thoma, Simon Wren-Lewis, Paul Krugman, Robert Waldmann and David Glasner, among others. It’s over an issue that has come up before, and which I think will come up again and again over the next few years, because I think we’re at a shifting point in economic theory, partly due to the complete failure of macroeconomists to foresee the severity of our recent mini-depression, and partly due to the disastrously wrong predictions that flowed in rivers from the neoclassical economists about the possible impacts of macroeconomic policies. Investors will flee from U.S. debt soon, soon, soon!! Hyperinflation is just around the corner!! Interest rates through the roof!! Austerity will solve all of our problems!! Really? Well---no. Not really. The real world did not behave anything like that.

The question in this blog exchange is: what the heck happened forty years ago when the old Keynesian economics many of us older folks were taught in school more or less vanished from the journals and conferences and textbooks, and was replaced by rational expectations and neoclassical micro-founded macro models? In this now forty-year-old counterrevolution to Keynes, macroeconomics starts with agents at the micro level who rationally, with infinite mathematical precision, select a present action that maximizes their overall welfare by trading off their welfare in the present time with their expected welfare in future times. This trade of present against future is an absolute in these models: it has to be there, or the model is suspect. All of the bloggers above see this wholesale expulsion of meso-Keynesian theory from the academic respectability as a bad thing, although some seem to approve at least part of the neoclassical vision. Simon Wren-Lewis, for example, starts by saying that “intertemporal theory is the right place to start in thinking about consumption, and exploring the implications of time inconsistency is very important to macro policy.” Waldmann disagrees, and to some extent I do too, for reasons I’ll talk about below. But it was Glasner, whose blog posts are almost as long as mine, who wrote openly and eloquently what I have been feeling for forty years, but was too intimidated to say out loud:

“the New Classicals chose to use microfoundations as a methodological justification for the extreme unrealism of the rational-expectations assumption…

Meekly and unreflectively, modern macroeconomics has succumbed to the absurd and arrogant methodological authoritarianism of the New Classical Revolution. What an embarrassment.”

Wow. And yes, exactly.

There is one point I want to add to the excellent blog exchange from a few weeks ago, but I’ll start obliquely, because it was this personal experience a few days ago that reminded me of it:

From time to time, when I find myself idly staring at the walls in the evening, too groggy to write a blog post or even read one but still too awake to retire altogether, I wander to YouTube to see what I can find. Usually I’m looking for some kind of classical guitar music, or old acoustic blues, but the column of related videos down the right hand side of the YouTube web site is a grand choose-your-own-adventure book. Once I lose control and click on one of those links, because it seems to point to something adventurous, I end up spending an hour or two following link after link. (Be patient. I know the wait is making you fidgety, but I’ll get to the economics of all this in a minute.)

I try to avoid anything that has the phrase “got talent” in the title; I’m not a big fan of watching people embarrass themselves in public, and that’s what those shows display much of the time. But every now and then I slip, and end up watching the YouTube versions of a “got talent” performance. And so, late in the evening, in a quiet and pleasant mood after a glass or two of Sauvignon Bordeaux at dinner, I ran across a video from 2007 of the very first session of the very first winner of Britain’s Got Talent. His name is Paul Potts. Since I don’t follow these shows I had never heard of him; maybe you have.

The performance was astounding. But I don’t really want to talk about Mr. Potts. I want to talk about the reactions of the judge named Amanda. Because the point of all of this is to comment on her description of Mr. Potts once he had finished performing.

So here’s the link. Take a look, and watch Amanda.

What did you think of her, and how she acted and what she said? She was clearly enormously moved by him; it was all she could do to keep her eyes dry toward the end. She had to breathe heavily during the last phrases of the aria that he chose to sing, Nessun Dorma (“no one sleeps”) from Turandot, and finally she had to press her cheeks with her palms to keep the tears from launching from her eyes, flooding the desktop and ruining her TV makeup. I don’t blame her. Sitting ten feet from a voice like that must feel like standing at the far end of a jetty when the typhoon hits.

And when she said what she said---that he was “a little lump of coal that is going to turn into a diamond”---I could hardly do anything but completely agree. (I don’t know if you’re an opera fan, but if not, trust me: that was an awe-inspiring performance for a Welsh mobile phone salesman, as you could see toward the end when the entire panel of judges was staring open mouthed at the stage.)

Later in the video she talks about finding frogs that are going to turn into princes.

It was not for half an hour, and another few links down the evening’s chain of music---and I admit, a few returns to watch Mr. Potts perform again---that I finally thought: wait a minute. Turn into a diamond? He already was a diamond, wasn’t he? She was visibly moved by the voice he already had, the performance he could already give. What was she thinking was going to change? Was she forecasting that his performance that night would bring him fame and fortune, and that those things, fame and fortune, would make him a diamond or a prince? No. I don’t really believe that. I don’t think she had really thought through what she meant. If presented with this argument, I think she would agree that he might have been a frog at some point, but he had already turned himself into a prince long ago.

Because that voice didn’t just emerge from his mouth that evening by spontaneous generation. Somewhere along the road, probably in his early childhood, he fell in love with opera, and spent long, long hours working at it, working at it, and yes, performing. He had to have had training, as well. Lots of it. Years of it. He may have been the lead in his high school musical, and sung in choirs, and done some community theater musicals or something, and probably been part of an amateur opera company. Amateur: for free! I think the rules of entry to the “got talent” shows is that you haven’t made money with your talent in the past. But even without being paid for it he sang, and sang, and sang, and trained and trained and sang scales and sang arpeggios, and sang phrases, again and again, to achieve that voice. Some of the singing was undoubtedly fun for him, but much wasn’t; it was hard practice, and he did it when he was tired. He did it after long days at Carphone Warehouse. Doing all of that, and having the driving desire in him to stick with all of that, made him a prince long before he entered “Britain’s Got Talent”. That show was just the first time the rest of us had been given an opportunity to notice that there was a prince living among us, selling mobile phones in Wales.

And that, of course, is why there are competitions like Britain’s Got Talent: we know that the world is full of things we haven’t seen, and full of people working hard, alone, often for free, to do things that may someday amaze us. This hidden world of dedicated work is like a current deep under the surface of the ocean, like magma deep under the ground, invisible to us, but moving and pushing until, sometimes, it breaches the surface and changes everything.

Which made me think about the nearly universal assumption in labor-leisure trade-off models that we are all so abysmally lazy that we can only be induced to work by offering us a wage that is worth more to us than our leisure time. Leisure time?? How do these models explain Paul Potts, and the fact that he worked so hard for so long, working to exhaustion without ever being paid, and training at his own expense? Why did he do that? But more relevant to this post, it also made me think about the distribution of information in a market economy and about Hayek and the role of prices, and, yes, about the ubiquitous, insistent use of macro models based on every agent’s ability to rationally, precisely, trade present and future welfare. If we are all so good at seeing the future, and basing present actions on their present and future impacts, how do we explain the fact that Mr. Potts could suddenly appear in front of us fully trained, a magnificent opera singer? You understand that in order to form a present expected value of future outcomes we have to be able to define all the possible future outcomes, and attach a probability to each of them. Where is Mr. Potts in our rational deliberations? How can we attach a probability to something we don’t even know could ever exist? Did the price system really convey to us all the information that we could possibly find useful about his existence?

I don’t mean to dismiss Hayek here; just the opposite. As far as it goes, his paper is right. He explained his point very well in the link above. Hayek was trying to compare a price mechanism in a competitive economy with a central authority that simply imposed an answer. His point was that the economy is so complicated, and the actors so local, that no central authority could possibly know enough to solve the complete problem of proper behavior, proper production and consumption, by every possible consumer and business, and of every possible resource and product. Importantly, it’s not just that the problem is too big for us to calculate. Maybe a bigger computer could fix that. It’s that the required information is just too obscure and far too widely distributed, and constantly changing. No individual, and no central authority, can possibly weigh one change against another, and allocate resources to accommodate them all, simply because only the few people involved in the changes are really aware of them. A price mechanism manages to convey just exactly enough information, if we want to call it that, or enough incentive, so that each local actor everywhere will react in more or less the right way to adjust current demand and supply to distant changes he or she cannot possibly know about, simply because scarcity causes prices to rise, and so induces each actor to use less or produce more, and abundance causes prices to decline, and so induces each actor to use more or produce less of whatever it is. We never have to know why a scarcity or abundance has happened.

And I agree with that completely---in the instant. Paul Potts is an opera singer who was hidden from almost all of us until he performed in Britain’s Got Talent, and to the extent that his long solitary efforts to achieve his skill made some resources more scarce or abundant, we, in some infinitesimally small way, all helped to adjust the economy to that change, even though we had no idea he existed. But we couldn’t predict his skill. The price mechanism may help us adjust in the instant, but it can’t help us adjust to the long run emergence of something we can’t foresee.

Our inability to forecast Mr. Potts’ skill may not strike you as important. If not Mr. Potts, then some singer will come along; we can forecast that. Right? But Mr. Potts is not the only person out there working from sheer dedication to something, and far from our awareness. There are people who are inventing new technologies, or new methods, or new science that will change not only what is, but what is even possible; or new methods of attack or destruction (not all invisible change is good). We may not need to know what they are doing to adjust our consumption or production to materially accommodate them, but when their efforts suddenly thrust their way into our worlds they will transform us. And because their activities are hidden from us we cannot possibly predict their impact on our lives. Seemingly from out of the blue one technology is tied to another, the clunky text based internet is enhanced with hyperlinks, and then with a print media markup language, and the World Wide Web explodes into a tech bubble in the 1990s. From out of the blue an obscure group of discontents across the world decides to use commercial airliners as a weapon of terror, and crashes them into towering buildings in New York and squatty pentagonal buildings near Washington DC, and our political world is transformed utterly. We can’t possibly plan “rationally”, in the way that many microfoundation-based macroeconomic models use that word, for a future filled with events like these that we can’t predict, at least partly because things from distant places or distant minds, things that Hayek’s paper says we don’t ever need to know about, will appear to us like miracles or catastrophes when they finally reveal themselves to us fully formed.

There are undoubtedly events in the future that no one on earth can predict, at least not yet: acts of God or human genius, sheer incalculable accidents, chaotically emergent “shocks” to our economic system. But there are thousands upon thousands of events, huge and tiny, that are created by human effort, events that are part of the solid ground of economic life, but that only a few, only those that are working on them directly, can really predict; and because there are so many of them there is no one who can predict all of them. And because there are so many of them, it’s absurd to act, as the modern models require, as though each “representative agent’s” economic future were stochastic but subject to predictive calculation, and dully reducible to “rational” expectations.

Defenders of the modern economic faith will reply that the models may not incorporate them, because they can’t, but everyone is aware of the possibility of rare “external” economic shocks---external to their models. But I’m saying that these shocks are not rare, not unusual, that they are part of the core and constant fabric of economic life, and that everyone who is not steeped and vested in economic theory knows it. Can we predict 6 months out? Possibly, unless there is a major “external” shock in the next 6 months. But we expect to be at least a little wrong, in part because there will, without any question, be a vast array of minor external shocks that no central planner, and no economic forecaster, can possibly predict. And our forecasts out 5 years, or 10 years, are the best we can do, but they will, with absolute certainty, be wrong.

Our economics should acknowledge this fact: the general public doesn’t try to make forecasts out that far, because unlike us they understand that it’s an impossible task. Even those who are working hard on one of these hidden things can’t be sure what the reaction will be, how it will interact with other things happening at the same time, how it will really impact the world. And they can’t predict what reactions their ambition will cause, creating new ambitions in others. The world is busy. Nessun dorma, nessun dorma, no one sleeps. Or rather, more accurately, we don’t all sleep at the same time; there is always someone awake. Twenty-four hours a day someone, somewhere on earth, is devoting long dedicated hours to creating a future event, large or small, that will astonish the rest of us when it emerges. We see the economic surface, but far under that the magma flows, the restless magma of human dedication, for good or evil, presses against the world, and when the world cracks to release it all of our prior expectations are scattered across the ground, and a new future covers them. And that, among many reasons, is why the perfect-world, rational-expectations, Euler-equation dominated macroeconomics that assumes a stochastic general equilibrium future that we can reduce to a current expectation, simply doesn’t work, and never will work no matter how much we refine it. Others out there are awake, and moving and working, invisible to the workaday wage economy, and they are creating a future the representative agents in these models can’t even imagine, much less assign a probability to and reduce to some bland “present value”.

Nessun dorma: and for economic forecasts, including the forecasts we attribute to the representative agents that we embed in our models, that ground truth matters.

Capital, corporations, and a post for labor day.

noreply@blogger.com (Stuart) — Mon, 01 Sep 2014 21:25:00 +0000

(note: this post turned out to be way longer than I meant it to be, so I should take the time to cut it down. But I want to get it out on Labor Day, a day dedicated to workers rather than owners of capital. I put a line about halfway down; there's a bunch below the line, but I'll understand if you want to stop there. Actually, I'll understand if you want to stop here. Follow your whim.)

Let’s see…I said I would talk about taxing capital. Before I do that, I want to clarify something from my last post. It will probably give you some indication of my age if I tell you that William of Ockham was a personal friend of mine when I was young, and I always admired his razor. Simplicity is good. When I said in my last post that we should raise corporate income tax rates and increase the deductions available to corporations to drive the effective tax on corporations to zero, I didn’t mean that we should multiply their number or complexity, only the total size of the deductions they provide.

The comment about my advanced age was largely because the discussion about capital taxation, which has been raised repeatedly by at least one segment of the corporate tax discussion, seems to be dominated by a result that is often called “classic”---and that was first published well after I completed my trip through the graduate program in economics, and well after the turbulence of my early career had landed me in a job where instead of doing economics I supervise engineering project. It dates to the mid-1980s. It’s called, in the usual academic shorthand, by the names of the people who first offered it, and in particular to Christophe Chamley and Kenneth Judd: it’s called the Chamley-Judd result, sometimes even the Chamley-Judd Theorem. The theorem claims that we should not tax returns to capital at all, and that all taxes should be paid by labor.

To understand what Chamley and Judd are getting at, you have to understand that the “capital” they have in mind is tangible capital, not financial capital: plant and equipment, computers, office buildings, hammers, cranes, trucks, tools, but not bonds or other financial assets. This kind of capital is the stuff that economists want to put into a production function that looks something like this: Q=f(L, K), which means that the total quantity produced is a function of the labor used and the capital they have to work with. The Chamley-Judd theorem, which is pretty interesting if used reasonably, shows that under a bunch of very restrictive conditions the optimal rate of taxation on the income earned by owning this kind of capital is zero---and they mean optimal in the long run for workers even though the workers will have to pay additional taxes to make up for the revenues lost by eliminating taxes on capital income. Sometimes politicians and some economists use this theorem to justify proposals to decrease taxes on corporations, although usually not to zero. (There are other inputs to this discussion that come to a different optimal rate by relaxing some of the restrictive conditions required to get the Chamley-Judd result. A recent paper by Thomas Piketty and Emmanuel Saez found that the optimal taxation of inherited capital was as high as 60%. )

Here’s a sample of the kinds of things people say, more or less as an argument to stop taxing corporate dividends, from the Library of Economics and Liberty:

“let me sum up a key implication of Chamley-Judd:

Under standard, pretty flexible assumptions, it's impossible to tax capitalists, give the money to workers, and raise the total long-run income of workers.

Not, hard, not inefficient, not socially wasteful, not immoral: Impossible…

Good economic policy doesn't try to do things that are impossible. And if the world works roughly the way Chamley and Judd assume it does, a long run policy that redistributes total income from capitalists to workers is impossible. “

To which the proper response is: wow. This isn’t the usual let’s-reduce-the-rate-and-eliminate-loopholes-to-be-revenue-neutral argument. It isn’t the end-double-taxation-of-corporate-income argument. This is a theorem, proved with mathematical rigor, that shows that it’s bad for workers in the long run to tax either corporations or dividends at all, at least if “corporations” and “capital” are interchangeable words, so that taxing corporate income is the same thing as taxing capital.

Well, since I said in my last post that I want to drive effective corporate taxes (not corporate tax rates!) to zero I probably should not question the Chamley-Judd result; I should just go with it as a statement not just about capital but about corporations. But I have some reservations about how applicable it really is to whatever it is that corporate taxes (or even taxes on corporate dividends) tax. First, as we noted before, the capital considered leaves out any incomes corporations receive from bonds, mortgages, insurance or any other financial capital. But the model doesn’t include human capital either, or non-capital human progress; all labor is the same, present and future. Actually, all capital is the same too, which means it doesn’t include the kind of intellectual capital that is embodied in technological progress in production, and which is often created through the labor of workers (for example, by workers called "engineers"). A different formulation of the model argument might conclude that we should never tax the income of engineers. I’m not by any means the only one to recognize all of these things; here’s Steve Randy Waldman on it:

“In empirical fact, 'human capital' and its more sociable, incorporeal twin 'institutional capital' seem to be much more important predictors of the growth path of an economy than physical capital. Europe and Japan bounce back quickly after war devastates their infrastructure. But imagine that a Rapture clears the Earth and pre-agrarian nomads take possession of perfect gleaming factories. I think you will agree that production does not recover so fast. Human and institutional capital dominate physical capital...

Further, while physical capital grows by virtue of nonconsumption, it seems plausible that human capital development is proportionate to its use, which would render a tax penalty on 'wages' particularly destructive. Fundamentally, Chamley-Judd logic suggests that we should tax least the factor most capable of expanding to engender economic growth. You don’t have to be a new-age nut to believe that human and institutional development, which yield return in the form of wages, may well be that factor. It is perfectly possible, under this logic, that the roles of capital and labor are reversed, that the optimal tax on labor should be zero or even negative, because returns to physical and financial capital are so enhanced by human talent that even capitalists are better off paying a tax to cajole it.”

The model also barely recognized the existence of government except as some external agency that for some reason sucks away taxes every year and uses the funds to buy some of the produced goods and make them magically disappear. In other words, in this model government doesn’t actually do anything, it just costs money and gobbles things that could otherwise be consumed by its citizens. And the theory doesn’t include corporate reputation, or branding, or business relationships, business culture, or any culture for that matter, at least not in a straightforward manner, so taxing corporations and corporate dividends is not quite the same as taxing capital in the sense that Chamley and Judd have intended. Finally, the equation above is about how to produce things, not to sell them (there is often an unstated presumption in these small models that anything produced will be sold, which, of course, would immediately eliminate the need for advertising, which in turn would be a real downer for any future season of “Mad Men”), and production is only increased in the model by adding more labor (not improving it), or adding more capital (not improving it), or both. (If value of a company were the same as the value of the physical capital owned by the company, then the book value would be the same as tangible book value, which excludes all kinds of values that are not tangible assets. Needless to say, those are not the same thing and never the same value. And even total book value doesn’t contain every asset that makes a share worthwhile or makes a company profitable; if that were true, the ratio of price to book value would always be 1. It isn’t. )

So “corporate profits” and “returns to capital” are not the same thing. But it’s still worth a look at Chamley Judd, because the model makes at least one very good point, which, frankly, is all you can expect of a model that so heroically simplifies the world. This is what I think much of the world of conservative economists fails to understand, not only about this but about a lot of small models that make a point, such as the modern version of Ricardian Equivalence. It’s a parable. It describes a simple lesson, one lesson, not a complete panoramic intellectual tapestry of the meaning of life. And in particular, models that assume away unemployment or demand failures are completely at odds with the tapestry and meaning of life. So the models are good for illustrating their single lessons, but they are useless as a basis for policy.

_______________________________________________________

There are (at least) two basic ideas that appear to me to drive the result: that an increased rate of investment in new capital will raise wages over time, in the long run, enough to compensate workers for accepting the total burden of funding the government without any help from a tax on capital income, and that a reduction of tax rates on capital will induce increased rate of investment in new capital. Let’s look at both of them.

The first relies on the assumption that capital accumulates over time and labor doesn’t, as Dr. Waldmann observed in the link above; if we encourage the formation of this cumulative capital workers in the future will have more capital to work with, and so their labor will be more valuable---and so their wages will be higher. Taxing labor more heavily might discourage labor in the short run, but lower labor availability right now, in the world the model describes, won’t impact next year’s production possibilities, since the same amount of raw labor will be available then. But if taxing capital discourages capital formation, that does impact next year’s possibilities, and the following year’s, and all future years’ possibilities. In the long run, accumulation of capital will raise production and productivity of workers so much that the increased rate of taxes on workers to pay capital-income’s share of the cost of government will simply be overwhelmed by increased wages. So the specific lesson within the model is that the cumulative formation of capital in the production function is in the best interests of workers even if encouraging capital formation means higher short run taxes on labor.

But the generalized lesson, given how the model comes to its conclusions, is that anything that cumulatively increases production possibilities should be encouraged even if that means that we have to pay higher tax rates in the short run. And if that’s the generalized lesson, then why stop with privately owned capital? Why not include the accumulation of national infrastructure as an input to the production function? Or the human capital that is created by public schools? Or the intellectual capital that is created or at least seeded by government research? Surely a similar model that includes a government that doesn’t just gobble goods and make them vanish, but instead turns them into additional public capital, human capital, and intellectual capital that are cumulative inputs to the production function, would show that higher taxes to pay for those things are justified by long run increases in productivity. I don’t plan to create a model like that just for this blog post---way, way too much work---but the underlying generalized logic of Chamley-Judd sounds like it would lead to that conclusion. Also, a similar model would show that if the value of capital is cumulatively enhanced by technological progress created by labor, then the owners of capital should be willing to pay some taxes in order to reduce the tax burden on those workers to induce them to work more, and to create more cumulative technological change.

The second basic idea that is required for this theorem is that the level of investment in new capital is a function of the return to capital, which is decreased by the tax rate on capital---lower tax rates, higher after-tax return, more investment. If that’s not true, then why lower rates? The workers would get nothing out of paying a higher share of the cost of government if the sacrifice didn’t induce more capital formation.

So is that true? Certainly it’s true that a lower tax rate would increase the after tax returns to the owners of capital, but is it true that the rate of investment in new capital depends largely on the after-tax returns to owners of capital? That’s what the usual train of thought that’s drilled into us a undergrads would lead us to expect.

Here’s a graph from FRED (Federal Reserve Economic Data). The blue line is private nonresidential fixed investment as a share of GDP. The red line is the best measure I could come up with on short notice for average after-tax return on investment; it’s total corporate after tax profits as a share of nonfinancial corporate business nonfinancial assets. Hey, it’s not perfect, particularly since corporate profits are a function of a lot more than just the owned capital, but it’s something.

I don’t know about you, but I don’t see an exact correlation between these two lines.

Well, then, if it’s not after tax profits, what does drive private nonresidential fixed investment? Good question. It’s clearly not just interest rates either, or investment would have soared after 2008 when the interest rate was driven down close to zero.

I have a theory: it’s all driven by magical creatures. No, really. The link is to my second post in this blog, where I said:

“I do have a kind of faith in something beyond the mathematics that moves the economic world. I believe that there is a group of magical creatures out there, a special kind of creature that makes the economy come alive; when they arrive in large numbers, businesses pop into existence like mushrooms in the woods after a spring rain; when they arrive jobs are created, and wealth is created. When they leave, jobs are lost, wealth is lost and businesses die. Really. I’m not making this up, and I’m not the only one who believes in these creatures. Sober businessmen know about them and seek them out, and spend large amounts of money hoping to coax them from their hiding places.

We call these creatures ‘customers’.”

In this case, it’s not really the customers themselves that make businesses invest in new productive capacity. It’s the belief that customers are coming, that when the new capacity comes online and starts producing stuff that there will be customers out there to buy it. There is a regularity I notice in the graph above in the investment/GDP line: it always seems to have a downward slope during or before recessions (the gray vertical bars).

In terms of the model we’ve been talking about, though, this means that the way to induce increased investment in each year is to convince investors that there will be enough customers available with enough income in the following years to buy all the new product their investment will enable them to make. Which is a problem: the providers of labor get about 70% of total national income; owners of capital and land get the rest. Reducing taxes on the income from capital won’t, by itself, create a rosy vision of a future teeming with consumers. But reducing taxes on wages might…and increasing taxes on wages, in that case, would produce exactly the opposite of the effect presumed by Chamley-Judd.

How to stop inversions: increase the corporate tax rate. Yeah, you heard me.

noreply@blogger.com (Stuart) — Fri, 29 Aug 2014 23:54:00 +0000

I’m not going to write about the Netherlands today, even though Craig said I should. He said that because I’ve had an inexplicably large number of blog hits from the Netherlands lately, and he wanted to see what would happen if I actually wrote about the Netherlands, just as an experiment. Maybe just using the word “Netherlands” a lot of times in this first paragraph will be enough to conduct at least a minor experiment on this question. (Just to be clear, for casual visitors who arrived here by taking a wrong turn at Google, an “inexplicably large number” in the case of this blog is 40 or so on several recent days. Other than my friends, I get only a few visitors. Which is ok; I’m just one more economics blogger in the vast universe of economics bloggers, and many of the best economists on earth have excellent blogs. But here are the numbers: even though I haven’t posted anything since July 20^th, and have only written four entries this year, I’ve had 515 hits in the past month on this blog. 241 of them---nearly half---were from the Netherlands. I don’t have any idea why.)

Here’s what I am going to write about: Charles Krauthammer, Dean Baker, Jared Bernstein, Matthew Yglesias, Josh Barro and a whole bunch of other responses to the recent excitement about “inversion”, corporations moving their headquarters to other countries to escape high tax rates here in the United States. I mention Krauthammer first because (and this shakes my faith in myself to the core; if this keeps up I’m going to stop reading my blog altogether) I agreed with almost everything he said. Almost. I also agree with Baker and Bernstein, mostly, although they were writing to dispute each other. After a couple words about inversion, or maybe tomorrow, I’m going to add a word or two about the relationship between taxing corporations, which is what this issue is about, and taxing capital, which is way more interesting than it sounds, and is sometimes mistaken for the same issue. (Hint: they are not at all the same issue.)

The first thing I want to say about inversion is to speak as a liberal to my brothers and sisters on the liberal side of the political spectrum, and to the White House. What I want to say to them is this: chill freakin’ out! If you keep hyperventilating you’re going to faint. Obama’s fevered reference to “corporate deserters” is irrational, and unfair. It’s silly to blame corporations for doing whatever is in their best interest to do, as long as it’s not illegal or immoral, and seeking out the best legal tax environment is neither. It makes no more sense to blame corporations for seeking most advantageous location to settle in than it does to blame rivers for flowing downhill instead of up. Water seeks the lowest point it can find, and corporations seek profits. After-tax profits. That’s what they’re created to do.

Here are the raw numbers from the OECD on total corporate tax rates. The table combines “Central and Subcentral” taxes, which means that state and local taxes are included. There’s a scroll-bar at the bottom so you can move through the years from 1981 to 2013. If you do that you’ll notice that the issue is not that our tax rates are historically high, but that other nations have reduced their corporate tax rates over time to draw businesses. There’s been a race to the bottom in corporate tax rates, and we have chosen not to compete in the race, or not to compete as vigorously as other countries have. In 1981 our corporate income tax rate was 49.7%; now it’s 39.1%. By contrast, Sweden’s corporate tax rate in 1981 was 57.8%, and now it’s 22%; Ireland’s was 45% in 1981, and now it’s 12.5%. We have the highest corporate tax rate in the OECD table now, not because our taxes have gone up---they haven’t---but because everyone else’s tax rates have come down so much farther than ours have.

Krauthammer says that the solution to the problem of corporate flight from high tax rates is tax reform here, rather than building a legal wall to keep corporations from leaving. So far I agree completely with Krauthammer, which is, as I said, disturbing. Later in his column he does recognize that the 35% top federal corporate tax rate is not really the effective rate that corporations pay: because of loopholes some of the larger corporations, according to Krauthammer, have effective tax rates of 13%. I’m not sure where he got that figure. Some corporations, some years, pay no taxes at all. And this matters: corporations’ decisions on whether to move to another location will be based (in part) on the effective overall tax rates they pay in each place, not on an imaginary top possible rate.

Of course Dr. Krauthammer blames Obama for the lack of corporate tax reform, forgetting that there are big differences of opinion on what constitutes “reform”, and also that if Obama proposed a bill honoring motherhood and entirely eliminating corporate taxes the Republican house would be bent double in a seizure of feigned indignation, and would threaten to throw Boehner out of the House leadership if he even brought it to the floor, which, of course, he would not do. They would turn it into a scandal of some kind, God knows how. Darryl Issa would hold hearings on whether to impeach Obama and Hillary Clinton and possibly Bill Clinton and John Kennedy too, for proposing such things; his committee would eventually produce a final report at enormous public expense basically exonerating everyone on whatever they had decided to be upset about, and Fox News would ignore the final report and maintain their outrage on the grounds that, well, on the grounds that outrage is more fun than pretty much anything and anyone who exonerates Obama or Clinton is a poopy stupid-head. So I disagree with him on whom to blame, but that’s secondary. The real question is what we should do now. And “tax reform” is as good a name for what we should do as any. But to Krauthammer and most people on the right (and many on the left), “tax reform” means reducing the tax rate, but eliminating loopholes so that the action is revenue neutral. In other words, reduce the top rate, but keep the average effective rate the same, more or less, which, if effective tax rate is the motive, doesn't really sound to me like it would reduce the incentive for corporations to find some other lower-tax location for their headquarters. And also, the first part of that (lower rates) is easy, the second part (eliminate loopholes) is damned near impossible, as Matthew Yglesias points out at the link above, which is why it’s so hard to get done. And anyway, as I’ll explain in a minute, this is exactly the opposite of what I think corporate tax reform should be.

Now, I’ve said before that I don’t like the corporate income tax anyway---if there were a way to do it I’d favor a zero tax rate for corporations. I’ve written about that here on this blog. Corporations are not people, so they have to pass the taxes we levy on them along to real human beings one way or another, and it’s not at all clear that the owners of corporations pay all of it, or even most of it. From Matthew Yglesias:

“An interesting theoretical question is who actually does pay the corporate income tax? Does it fall on workers? On owners of land? On owners of capital? I can assure you that after reading a few papers on this thanks to the National Bureau of Economic Research's search tools that the answer is credible researchers disagree and the answer is highly sensitive to modeling assumptions!”

When I first said that decades ago, and even fairly recently, people on the liberal side of the world were aghast at the thought. But apparently there’s been a revolution brewing that I never saw. Dean Baker’s post, at the link above, comes out in favor of eliminating the corporate tax and raising the tax on the wealthy to make up the lost revenue. Josh Barro, at the link above, suggests the same thing.

But Jarred Bernstein raises the issue that has always actually given me some pause, and states it so well that I have to change my mind about eliminating the top corporate tax rates. As he says (at the link above), eliminating corporate taxes:

“risks turning the corporate structure itself into a big tax shelter: If income generated and retained by incorporated businesses should become tax-free, then guess what type of income everybody will suddenly start making?”

Yeah. Dammit.

So eliminating, or even reducing, the corporate tax rate is not a good idea. Time to uncork the theory of the second-best, then. If we can’t reduce rates to zero because ordinary people would suddenly become corporations, I’d suggest that corporations should pay the personal tax rate on their income, so there’s no incentive at all for people to pretend to be corporations as a way to shelter their income from taxation. But I still think that corporations should pay zero or near-zero effective income taxes. In other words, we should raise tax rates and increase tax deductions (which is the other word we use for “loopholes”) not just to be revenue neutral, but to drive revenue from corporate taxes down near zero. Of course, there would be a huge fight about which deductions are worthwhile and which are not, and how to design the system so that all industries have exactly the tax breaks they need to get them to zero effective profit tax. And yes, that means that we would need to raise the lost revenues elsewhere. But there are plenty of good options: how about a carbon tax to fight global warming, or other Pigovian taxes to internalize production costs and promote the general welfare (which according to the preamble to the Constitution is one of the primary goals of the government that constitution created)? How about a financial transactions tax to reduce computer driven speed trading in the stock market, which seems to have no purpose other than to make money for the computer’s owners and lose money for everyone else? I know, those would be big political fights, but the point here isn’t what’s easy to do, it’s what might be good to do if we could. And if we could reduce the effective tax rate to zero by adding good loopholes, that would also eliminate any reason for corporations to move somewhere else---unless the other location had effective taxes less than zero.

See? Definitions of tax reform differ from one person to the next.

I guess I’ll talk about taxing capital tomorrow.

Frayed border. Or 'fraid knot.

noreply@blogger.com (Stuart) — Mon, 21 Jul 2014 01:11:00 +0000

Just a quick rant on the border children. Please, if you have an opinion on this, leave a comment. I’m not an expert on any part of it, so please educate me. But I can see what it looks like: a flood of refugees, as we have seen in this world in other places and at other times, fleeing from wars or disasters. Only in this case, at this time and at the border of our country, there is a very large component of young people, mostly teenagers but also younger children, in this refugee population.

Here is the data. (Always nice to start with the facts, don’t you think?) Go ahead, take a look, I’ll wait.

Notice that in every sector except Tucson the “apprehension” of “unaccompanied alien children” has had a huge increase, but in one sector, the Rio Grande sector, it has been staggering: from 14,565 in 2013 to 42,164 in 2014 (which isn’t even over yet!). That’s an increase of 189% so far and it will be far larger by the time the year is over. But even that understates the problem, because there has also been an over 500% increase in that sector in the apprehension of “family units”. These are people that seem to be traveling as a family. But it’s more than possible that a very large number of these family units were not families when they started their journeys toward refuge. Some “families” were probably formed rapidly as the border approached, so that the adults involved could have a better chance of staying here for at least a while.

Congress, of course, is going on recess. But I’m tired of complaining about Congress. Let’s discuss this among ourselves, and let them pursue their bewildered irrelevance at their leisure. They are involved in a deep argument over whether this influx resulted from a 2008 law passed under George Bush or from a more recent executive action by Barack Obama. Both of those may contribute, but to attribute the flood of refugees to either of those is just wrong: the cause of the flood is not a porous border or leniency for children. The cause is that the life they are fleeing is enormously worse than the life they expect when they get here, and that life, the life faced by those few who are allowed stay, is no picnic. They will be paupers, and illegal immigrants with no rights here at all. And the journey they undertook to get that dismal chance was long and terrible.

But what they left is overwhelmingly worse. It must be worse, or why would they come?

There are several pieces in the Washington Post this morning on this, but there is only one that is required reading. Oscar Arias (Nobel Peace Prize winner and twice President of Costa Rica) wrote this article on the Opinion page in the front section. If I quoted as much of his comments as I’d like to I’d undoubtedly run afoul of some copyright law, but let me give you this much:

“The conservatives who oppose President Obama’s request for emergency funds for the crisis criticize him for dealing only with the symptoms and not with the ‘root cause’ of the problem. They are half right — but the half that’s wrong is very, very wrong. For them, the root cause is a lax immigration law, weak protections or insufficiently severe punishments. But no punishment, no wall and no army can solve this problem…If these children … are willing to risk their lives atop the infamous train through Mexico known as La Bestia (“the beast”), face the rape and abuse that many children experience during the journey, sell their possessions and their bodies, and give their life savings to unscrupulous smugglers, what else could possibly deter them? What can the United States do to these children that would be worse than what they are already suffering? And why is such a great country even asking that question?”

Yes. They face certain danger, hunger and abuse on the road here, a high probability of rape, or of being sold into servitude, or of death. They are leaving the country they know, the language they know, the customs and people they know, their families, their friends. What punishment can we impose, what deterrent can we bring to bear, that is worse than what they are enduring to get here? We can send them “home”, to face dangers that they think are even worse than the journey here. And if we don’t make an anguish for them here that is worse than the one they are fleeing, they will continue to come. This is basic economics: these people are making, we assume, a rational choice, weighing one set of risks against another, and will continue to make that same choice as long as it appears to be rational to do it.

But it’s the last question in that list that haunts me. Why the hell are we talking, and waiting, as though this were simply a dessicated debating point? Why is a great country, this great country, my great country, asking that question? There are tens of thousands of children who need help, who are desperate and alone in the world, facing poverty and legal limbo if they are allowed to stay and vastly worse poverty and violence if they are sent back home with no support and no help from the world.

Arias goes on to say:

“The root cause of this crisis is not U.S. immigration law or the policies of one U.S. president. The root cause is the violence and poverty that make these children’s lives at home intolerable. The root cause dates to the parents and grandparents of the young people fleeing their countries today — our region’s ‘lost generation,’ those who were children and teenagers in the 1980s. Back then, two superpowers — the United States and the Soviet Union — chose our region as a place to work out their disputes. They were eager to help Central America transform students into soldiers. They were eager to provide the weapons while we provided the dead.”

Does he sound bitter? Maybe. But he lived through that period; he was President of Costa Rica the first time from 1986 to 1990. And his comments make sense to me. But in truth it doesn’t matter much right now who we blame, or how far back the blame goes. It doesn’t matter whether it is Obama’s fault, or Bush’s fault, or the cold wars, or the drug wars.

What matters, for the moment, is the present tense, not the past tense or even the future tense; what matters is the human story, the many human stories, appearing on our side of the border every day. They need shelter, and food, and medical care. We know how to provide those; we’re probably the best in the world at that task. Every time there’s a disaster anywhere on earth---tsunamis, earthquakes, volcanoes, hurricanes---our rescue teams and our Coast Guard and our National Guard, and our Marines, with all their ships and aircraft and trucks and ambulances, and thousands of eager young people who want to make a difference in the world, show up to help.

I’d like to invite the President and the Speaker to please get their heads out of their darker and more political body parts. But if they can’t manage that, maybe the rest of us can. Let’s take care of those children. We can assign blame, and choose what path we want to take to make the world harsher, and colder, and less human, when we’ve got the current flood of children cared for.

Or---once the immediate crisis is under control---maybe we can undertake the radical (from the root) solution everyone says they want. But that won’t involve some fiddling fix to our immigration laws. Since, as Arias argued above, nothing we can do here will make our border harsher or colder than the situation these people have left behind, why don’t we take the alternative path. Instead of making things worse for them here, why don’t we work with the Central American countries they’re escaping to make things better for them there?

Naah. Maybe that’s a bit too radical.

Here's to burned burgers and other carbon based products

noreply@blogger.com (Stuart) — Fri, 04 Jul 2014 17:56:00 +0000

It’s July 4, 2014, Independence Day in the United States. It’s appropriate to write something thoughtful about the history of the country, the meaning of the revolution, and all that---but it was a rebellion, and in that spirit I think I'll reject the cultural pressure to write about the whole 4^th of July thing, and write about something else entirely. I won’t even offer up an old family recipe for brioche hamburger buns or watermelon-wine sorbet or anything. The Washington Post op-ed page is full of that stuff, so I’ll just link to Samuelson, which, astonishingly, I found worthwhile today, and to Gerson too, who is almost always worthwhile even when I completely disagree with him.

So yesterday I was grazing through the econoblogs and followed a link to this discussion of the carbon cycle by Dr. Peter Dorman, which I thought was interesting and unusual in a site called “EconoSpeak”. The theory here is that emissions from gas-powered cars and coal burning power plants should not be considered “pollution” in a strict sense. Really, he says that. Here’s a quote:

“People whose actions move carbon into the atmosphere are not necessarily ‘polluters’. We’ll see this later when we look at electric cars. The fact that carbon goes out my tailpipe but not yours doesn’t mean that I am a carbon polluter when I drive and you’re not. As you can imagine, this misunderstanding plays havoc with the industry that calls itself carbon accounting.”

His idea is pretty straightforward, actually, and captured in the line "carbon will find a path". What this means is that once carbon is extracted from a safe sequestration far under the earth, it will spread itself out into the world, including into the atmosphere, no matter how it is used. The carbon cycle will extract it from whatever use you put it to, use it, spill it, twist it, turn it upside down and inside out, and in the end some fraction of it will be contained in plants, some in animals, some in the (shallow, accessible) ground, some in the surface ocean, and some in the air. Cars and factories are not the culprit: they are the most common direct path of carbon dioxide into the atmosphere, but not the ultimate source. There is only one act in the carbon cycle that can be described as causing carbon pollution: extracting carbon from deep in the earth and adding it to the carbon cycle up here in the surface world. The extraction of oil, coal, natural gas, or any other carbon-rich substance from deep isolation liberates it, and one way or another some of it will eventually enter the atmosphere, period. Like melting water on a hilltop moves in rivulets and then streams, or soaks through the earth, or in sliding ice-packs that we call glaciers, by one path or another it moves downhill, carbon will move by one path or another to all the repositories it uses, including the bodies of living things, surface earth, surface water and the atmosphere. Once freed from captivity in the deep earth, it will inevitably get to its various destinations in balanced proportions. That’s the idea.

But if not through factory or car emissions, how does it get from the surface in solid or liquid form into the air as a gas? Well...the two most widely discussed atmospheric gasses that contain carbon are carbon dioxide and methane. Biological sources account for significant amounts of the methane in the atmosphere. For example, one of the famous sources of methane pollution in the atmosphere is flatulence, the emission of excess carbon and hydrogen from the earth's 1.4 billion cows, or from its 7 billion people, or 19 billion chickens, or untold trillions of termites and methane producing microbes in the oceans, swamps and land fills. So if it's true that "carbon will find a path", and if we eliminate factories and cars by, for example, taxing them out of existence, we haven’t solved the long run problem. Carbon will just find its way into the atmosphere in other ways, possibly through increased (or prolonged) excretion of methane from animals. It may take longer, but if he's right, then eliminating carbon dioxide pollution from factories, power plants and cars only means that we'll fart our way to global warming. It might take longer but we’ll get there in the end.

Dr. Dorman didn't say this, but a fanciful vision I had when I read his blog post is that the release of new carbon from deep in the earth enables population explosions by providing the raw materials required to build new living bodies: all those new living things are built from carbon and that carbon has to be available. More carbon, more plants, livestock, people and microbes---and more carbon in the air from biological emission sources. Once we dig it up, it finds a way into the atmosphere, even if that involves using itself to build a lot more of us, and using us and our farms and waste dumps as a pathway into the air.

But that means that a carbon emissions tax on factories is the wrong approach: that just taxes the symptom. What we need is a tax on the real source of carbon pollution: the extraction of carbon from deep isolation in the earth. This would make gas and coal more expensive, and alternative energy sources more attractive, and would discourage carbon extraction into the surface world carbon cycle.

I'm not sure I completely buy the inevitability of it (there may be ways to re-sequester the carbon, to extract it from the air and capture it in a more or less isolated form), and reorganizing the emission sources away from factories, power plants and cars will at least slow the process, so I'm not really willing to abandon my support for carbon emissions taxes and subsidies for alternative industries that don’t push carbon directly into the atmosphere. But the story has a strong logic, doesn't it? Moving away from carbon fuels will slow things down, and so it’s a good idea for the “short run”---say, 50 years, or 100 years, or 1000 years---but to solve the truly long run atmospheric carbon problem we have to capture as much carbon back into a sequestered form as we liberate. That “carbon cycle” also has to balance, or we have no long run chance to avert global warming. So tax the source, and let the price mechanism induce a flood of ways to do without it. And subsidize technologies that sequester carbon (artificial diamonds?) to extract the carbon from the system.

The point of this notion is that it doesn't matter how we use the carbon once it's loose in the surface world. What matters is that we need it, and where we get it, and how we can remove it from the whole system, not just from the air.

Interesting.

Happy 4^th.

A puzzle on St. Patrick's day

noreply@blogger.com (Stuart) — Mon, 17 Mar 2014 18:26:00 +0000

First, a link to the greatest St. Patrick’s day video of them all: go here to elevate your vision and salute the true meaning of the day, as I do every year. Well, every year since 2011. Go ahead, I’ll wait. When you get back I have a puzzle I want to discuss.

Ok…the puzzle is this: why is everyone so dismal? And by “everyone”, of course, I mean economists. Oh, I know economics is called the dismal science, but that was just Carlyle’s response to Malthus, and more generally everyone’s response to the iron law of wages and all of that. But for the last century or so the iron law of wages hasn’t seemed quite so relentless. Economics has moved on. Hasn’t it? Most of us, at least in the more advanced economies, live at well over subsistence level these days.

So I was going to write something about the CBOs dismal outlook for the next few decades, which I think is premature at the very least. They are forecasting continuing deficits as far as the eye can see---that’s ok, we almost always run deficits so that’s a pretty safe forecast---but they’re expecting large deficits, weak economic growth, and high (or what they would call “normal”) interest rates, all of which mean that the national debt as a fraction of GDP will grow. A recent post by Robert Barbera pointed out that weak economic growth and high interest rates are an odd combination in a forecast; usually high interest rates occur (and the Fed allows them to occur) because of robust demand for investments, meaning that the economy is growing at a healthy rate.

I was going to write that the CBO’s recent long-run forecast were unduly dismal. The CBO has a pretty poor record for long-term economic forecasts. Of course, so does everyone else. We do ok on short term or medium term, most of the time. We’re usually (not always) ok on forecasts out six months or so, even a year or two. But nobody gets 30 year forecasts right. So the CBO forecast of unrelieved debt as a share of GDP seemed to me to set a special standard for cocky dedication to dismal.

But then I read this from Paul Krugman the other day. It’s not Krugman’s view, it’s Thomas Piketty’s view in this book, as reported by Krugman, that staggers me. The CBO’s long run expectations are a tiny forecast for a few decades out, in one country, and there are things that can be done about it if you believe the forecast and can get past Congressional gridlock. Minor stuff compared to the Piketty vision. Now, I haven’t read the book, so I’m reporting second hand. But reading through Krugman’s description, it sounds like a forecast of pitiless and inevitable doom for nearly all mankind, and for nearly all time. This recent joyful period of broad prosperity that we have experienced since the mid-nineteenth century is, in this view if I understand it, a historical anomaly, a temporary accident, and the age of Malthus, the iron law of wages, will return by the end of this century. Few people will have any economic security in that dreary future, even fewer will have wealth. Oh, there will be national wealth---but it will be narrowly owned. There will still be economic growth. But the wealthiest, the rentiers, will gobble it all up, leaving the rest of us to scrabble desperately for our daily food.

You can read through the Krugman piece if you are in the mood for some mildly wonkish modeling, but here’s the gist of it in one picture:

In this graph, the line with black diamonds represents the rate of return to owned assets, and the line with the open squares is the global rate of economic growth. If the first line is higher than the second, then the asset-owning class will get richer faster than the economy does, which means that income distribution will become more and more unequal. It’s a long run prescription for a small aristocracy and a mass of hungry, hopeless serfs. On the other hand if economic growth is higher than the rate of return to ownership of assets, then the asset-owners will gradually get richer, but the whole economy will provide enough so that the rest of the population rises even faster: the wealthy must continually refresh their wealth by contributing new substance to the economy, or they gradually, over generations, fade back into the general population.

It’s interesting to look at the difference between the period before about 1913 and the period between 1913 and the present. I’m curious about the source of the data, and the criteria by which time periods to present were selected. I mean, there was a massive change somewhere between 1820 and 1950, but it’s not clear from this graph when that change happened; we only know that 1913-1950 as a whole period was very different from the whole period from year 0-1913. Why? Well, we can credit technological progress, I suppose. We can credit democracy. We can credit the emergence of merchant banking, and national banking, and the gradual abandonment of the gold (or other physical stuff) standard. I’m not sure what Piketty’s explanation is; clearly this book needs to be on my reading list.

But what interests me most is the final two periods depicted in the graph. Why does Piketty forecast a return to 1.5% growth in the period from 2050 to 2100? And if the trend line is extended, maybe he sees a return to the period before 1820 when growth was less than 1% per year, generally significantly less. Why does he forecast that the return to asset ownership will once again soar to over 4%, and perhaps higher in later years? And this awful trend is completely separate from other apocalyptic future events, such as global warming; this calamity would happen in addition to that.

This matters. Is there really a purely economic reason to believe that the future is so dismal? Or is this forecast just one more bit of panicky pessimism, which will be forgotten when “animal spirits” rebound and new technologies arise to boost growth again? Is this new avalanche of dismal economics real, or just evidence that we’re all tired, and discouraged?

I’m going to be interested to read Krugman’s next installment in his book review. I’m going to be interested in the book itself. I have trouble accepting a future that bleak. I have trouble accepting a general attitude in economics that assumes a future that bleak. Come on guys. It's St. Patrick's day. Lighten up.

Talents, intelligence, work ethic, and sweet economic syrup.

noreply@blogger.com (Stuart) — Mon, 20 Jan 2014 00:15:00 +0000

It’s been so long since I wrote in this space, or any space, that I can’t remember how to string words together. But I want to respond to something in the Washington Post last week, a letter to the editor that struck me, from a gentleman named Mark Swierczek, which was itself responding to a previous letter from Robert Sutton. Both letters were expounding on the value and inevitability of income and wealth inequality in any free society. And both seem to me to suffer from a special form of self-inflicted ideological blindness that appears, if looked at with gauzy, vacant eyes, like clean and simple logic.

Here’s what they said, in their words. From Robert Sutton:

“Income inequality is the natural, expected and welcome consequence of an economically free society. Absent the shackles of an overreaching government and social engineers, income will flow to those with greater talents, greater intelligence and the strong work ethic to use their God-given blessings. Governments that try to reverse that flow will be forever tilting at windmills, since nature never will stop working against them.”

And from Mark Swierczek:

“Income inequality is, in fact, the force that drives our economy. By rewarding achievement, income inequality provides the motivation for people to work hard and be successful, much as winner-take-all prizes in sporting events lead to the most-contested, best-played games.

In a free market, income inequality is also self-correcting since, as people work their way to the upper end of the income range, inequality is naturally reduced. Programs intended to reduce inequality via artificial means, on the other hand, tend to reduce economic incentive and therefore perpetuate the very inequality they are intended to address.”

These two letter writers believe that inequality is acceptable, even virtuous, because it is the combination of an unequal distribution of virtue combined with virtue-dependent economic mobility. And there is a morsel of simple truth, of common experience, in that, which makes it appealing. People who work harder, with better attitudes, and who have better educations, do seem to get ahead faster, on average, than those who are lazy, or ignorant, or sullen. But why are they telling us this obvious thing? I think they’re arguing against a proposition that no prominent economist, politician or columnist has ever made: no one wants to impose absolute income or wealth equality, and no columnist I have read has proposed that we eliminate differential rewards for hard work, intelligence or creativity. We’ve always had income differences, and for large periods of our history that has been unremarked, because it was unremarkable. The alarm, when it has been sounded at all, is about the rapid increase in income inequality in the last thirty-five years; it is that all of the benefits of growth, and of increased labor productivity, over those thirty-five years have flowed to the very top of the income scale, and not to the labor whose production has increased. It’s about the rapid cultural change that has been highlighted in the work of Thomas Piketty from the Paris School of Economics and Emmanuel Saez at the University of California at Berkely, which showed in graphs that after a long period of relatively egalitarian economic growth we have now returned to the kind of income inequality that characterized the gilded age. A graph like this, using data from Piketty and Saez, was posted in the very first post in Paul Krugman’s NYT blog.

There’s a great deal to say about the potential negative economic impacts of income inequality that balance the positive impacts the letter writers describe. But I don’t want to dwell on that in this post, or on the Piketty-Saez data, because I think the letters above from Mr. Sutton and Mr. Swierczek make a more basic mistake. They may not find the change in income inequality relevant, because their subtext is that inequality itself matters much less than the income mobility that creates it. The subtext is if we diligently apply our “greater talents, greater intelligence and the strong work ethic”, we will be rewarded with a higher place on the income scale, so the station we hold in life is the station we have fairly earned. All of which sounds simple and compelling---and all of which is flatly contradicted by the evidence of the real world. The vision described by these two letter writers, which is a syrup of classical economic theories so distilled and simplified that few classical economists would swallow it straight, may describe some forces that are at work in the economy, but there are clearly other forces at work at the same time. If this vision alone described the world then differences in income inequality from one period of history to another, or from one country to another, could be explained by changes in the degree to which economic virtue is rewarded at different times and places. Hard work and talent would propel us farther, and create larger income inequalities, when economic mobility was high than when it was low, just as an object slides farther on ice than on asphalt.

But the by now well-known Great Gatsby curve shows that exactly the opposite is true. Higher income mobility between generations is associated with less income inequality, not more.

Here’s one version of the curve, from this study by the Center for American Progress, written by economist Miles Corak:

This curve plots the level of inequality in developed countries against the intergenerational income mobility in those countries. Countries farther out along the horizontal axis have more unequal household income; in this chart, the United States has---or had, in 1985, when the workers now reaching their peak earning years entered the workplace; this data describes the income inequality of their parents---the highest level of income inequality of all the countries shown. And income inequality in the United States has exploded since 1985!

Countries higher on the vertical axis have a less income mobility between generations (or, put differently, a higher impact of parent’s income in 1985 on current income of their children reaching their peak earning years). A quick glance shows that the correlation is just the reverse of that implied by Mr. Sutton and Mr. Swierczek . If they were right, then countries in which your success depended only on your own worth and your own work rather than on the advantages your parents could provide, countries in which income could “flow to those with greater talents, greater intelligence and the strong work ethic to use their God-given blessings” would have high income inequality, since the economy would unequally reward hard work and effort. The upward slope of the fitted line shows exactly the opposite.

The United States is among the most unequal and least mobile societies in this group; only Italy and Great Britain have less economic mobility between generations. The American dream of rising from humble origins to great success, or at least greater success than your parents experienced, is less likely in the United States than it is in Canada, or Australia, or Sweden---and far less likely than in Finland, Norway or Denmark.

(To be fair, Mr. Swierczek does claim that in a free market with nothing to restrict income mobility the striving of those lower on the income scale to rise will cause income inequality to “self-correct”---but this must mean that in his view Norway, Sweden and Denmark with their substantial welfare states financed by high taxes have much freer markets than the United States does, since their income inequality has “self corrected” while ours has not.)

Of course the existence of a correlation between income inequality and income immobility does not imply that one causes the other, but it’s easy to come up with arguments for causality in either direction. For example, income inequality may provide incentive to succeed, but incentive alone is not enough: incentive must be combined with opportunity, and opportunity is neither free nor distributed equally across the population. Those who begin with high family incomes can buy more of it, for themselves and for their children, than those who do not. So income inequality may create less income mobility.

It’s also possible that income immobility contributes, after multiple generations, to increasing income inequality, simply by building inequality between families as a residue over time. So less income mobility may create income inequality.

It’s possible to look outside this graph for causation, too; there are clear correlations of each of these two variables with some third characteristic (race, for example, or education) that continues across generations. The “greater talents, greater intelligence and the strong work ethic” will have a smaller reward for those held back by discrimination on the basis of race, or gender, or religion, or any other characteristic, than for those who are not. Educated parents read to their children more, and instill respect for education in those children, so the children of educated parents do better and go farther in school. And other differences between wealthy and poor contribute to income inequality for at least one generation, such as family structure: poor families are more often single-parent households than rich families, and that fact may create more resources on average---a greater variety of adults to turn to---for the children who live in wealthy households.

So the path to a more equal distribution of income may through a more equal distribution of opportunity, and a more equal reward for the hard application of work, talent and intelligence. I think Mr. Sutton might agree with that. He might support efforts to reduce the impact of racism, or sexism, on economic mobility.

But it’s also true that the path to a more equal distribution of opportunity and more equal reward for work and talent may run through a more equal distribution of income, and that no amount of effort to provide opportunity can compensate for the disadvantage of being born into a poor family in a culture with extreme income inequality. And that is the causal link that Mr. Sutton and Mr. Swierczek don't see, or don't want to see.

The point here is not that I have the answer; I emphatically don’t have any single answer. I suspect that every one of the elements I described above as contributing to immobility or inequality does contribute, and that there are many, many more that I didn’t mention. And nothing I've said here, no causal link I've suggested, explains the rapid increase in inequality, or the restoration of an income divergence rivaling the gilded age.

The point instead is that, as ideologically or personally satisfying as it may be to reduce the world to a one-dimensional explanation of inequality, particularly one that regards it as natural or just, the real economic world isn’t as simple as that. If either more equal economic rewards or more dependable rewards to talent, intelligence, creativity and strong work ethic matters to you, then you need to move beyond personal gratification, or self-justification, or ideological zeal, beyond the simplistic economic visions in the letters above. If these things matter, we need to create them and preserve them, because they don’t, unfortunately, create or preserve themselves.

Red over red: vessel not under command

noreply@blogger.com (Stuart) — Tue, 01 Oct 2013 19:05:00 +0000

So. Much of the federal government is now closed, and the rest is on borrowed time. A lot of people have been furloughed. Again. Others are working but may not get a paycheck on time.

Has it not occurred to the Tea Party caucus in the House that if the tactics they use today are successful those same or similar tactics will be used against them in some future conflict when they are in the majority? Do you think that's impossible? Remember that only a couple of decades back filibusters were extremely rare. Now they are standard, and nearly every bill in the Senate needs 60 votes to pass. What will the future look like when every budget bill, and every continuing resolution, and every debt ceiling increase, is seen as an opportunity for some disgruntled minority to overturn laws that a majority of Congress has already passed?

Oh...wait...that's what it's like now.

What Republicans should do…

noreply@blogger.com (Stuart) — Sun, 29 Sep 2013 23:57:00 +0000

Of course I have no standing whatever to advise anyone about how they should conduct their politics, or how they should pursue their political goals. But the current course on which Ted Cruz and his acolytes---or maybe his victims---in the house are set seems to me, and to almost everyone, as dangerous to the country, to the economy of course, and drastically dangerous to themselves. They disagree. We’ll see, I guess.

But I really don’t want to write about the House Republicans or Obamacare; they will do what they will do, and no amount of warning will slow them down. The Washington Post this morning quoted Michelle Bachmann saying that this threat to the Government of the United States (the budget issue), and later in the month to the economy of the world (the debt ceiling issue), is exactly what the Tea Party conservatives wanted to do, and that they have arrived exactly where they wanted to be.

Ok. Maybe. And there is nothing I can do or say that will change the next month. But in a longer sense, beyond the present turmoil, there is a nit I need to pick.

I live in a blue state, and in a very blue district in that state. We aren’t frozen in a fixed party devotion; our representative in Congress for many years---8 terms---was a Republican named Connie Morella, but she was a moderate, and in fact a charming moderate. People here voted for her at the same time that they were voting for Democrats for every Senate seat, for Governor, for President. She was a brand of Republican that is currently extinct. That is not just my opinion. That is Connie Morella’s opinion.

So of course, at the last Labor Day parade through Kensington, the town where I live, dozens of Democratic politicians who hold office or want to hold office drove by, walked by, waved themselves by, threw candy to the children, and generally behaved like politicians in a safe town. And there was also one Republican running for office who carried a sign that read, if I’m remembering it right:

“Fiscal Responsibility, Low Taxes”.

Yes. That seems to be the Republican stand on the issues. But in this blue district in this cobalt blue state, where the majority of the people vote for Democrats most of the time, I doubt if I could find a single person who disagrees with that slogan. I wanted to do a quick poll, asking each person I met whether they favored fiscal irresponsibility, or taxes that are high just for the sake of having high taxes.

So my nit is this: the slogan above has no bearing on the distinction between Republican stands on issues and Democratic stands on issues. No matter which side you ask, they will tell you that they are being as fiscally responsible as it is possible to be while still meeting the proper responsibilities of government. And they will tell you that they are trying to keep taxes as low as they can keep them while still being fiscally responsible.

Republicans need a much more substantive slogan if they want to get votes from people with even moderate views: they need a slogan that distinguishes them from Democrats. They have to tell us what they mean by “fiscal responsibility”, and why the policies that Democrats are proposing don’t meet that test. And they have to tell us how they plan to lower taxes and still maintain enough revenue to run the government, and meet all of the government’s responsibilities, without huge deficits.

But much more is riding on this than the votes of moderates. Because right now we are butting heads over issues on which I think we may all substantially, or at least partially, agree in principle. For example, you don’t want people taking welfare, or food stamps, or unemployment insurance, from the government---meaning from those of us who still have jobs---if they are healthy, able, and simply choose not to work. Guess what? Neither do I. If people are able to contribute and have that opportunity, they should contribute. On that the difference between us is our belief about the facts, not our underlying principle: my facts are that the great majority of people on foodstamps come from households in which at least one person is working (for a very low wage), and most recipients are off the program within a year. You may have different facts you want to bring to bear: but if we can recognize an underlying agreement about framework, and make this a discussion about the facts, we may get somewhere.

So, House Republicans: I get that this confrontation and its consequences are the product of the elections that took you into office, and that the wreckage of a government shutdown and a default on debt is something that right now it’s hard for you to avoid. But let’s start talking about real ideas, real facts, and real underlying principles, starting right now. Default is truly a catastrophic result: the dollar is the currency on which the world depends, and Treasury notes are the safe refuge to which international money turns when the world is uncertain. If those two lose the world’s trust, the 2007-2008 financial panic will seem mild by comparison.

So let’s talk, not in silly slogans and fake distinctions, but in real fact and real principle. Maybe, if we’re all still standing after we clear the rubble from this fall’s unavoidable confrontation, we can maintain a discussion that avoids the next nation-threatening, global-economy-threatening showdown, or the one after that, or after that. We can’t keep doing this, we can’t keep governing by showdowns at high noon, even if we always find last-minute escapes, without courting true disaster. Eventually this drama will wear the world’s credulity too thin to bear the weight of the vast structure of international finance.

And when that snaps we come to a very painful place.