EconoSpeak

Galbraith Replies to Keyserling

2009-11-22T19:49:00.003-05:00

Said Galbraith: "Mr. Keyserling has been reading my books and watching my actions for the last 10 years and finding evidence of wickedness which even I would not have thought possible. Feeling as he does, he was certainly right to alert the public."

Washington Post, February 15, 1968:

John Kenneth Galbraith, national chairman of the Americans for Democratic Action, took formal notice yesterday of charges that he has long been engaged in a devious campaign to defeat President Johnnson.

The accusations were leveled Tuesday by fellow economist Leon H. Keyserling in a protest against ADA's weekend endorsement of Sen. Eugene J. McCarthy for President.

Said Galbraith: "Mr. Keyserling has been reading my books and watching my actions for the last 10 years and finding evidence of wickedness which even I would not have thought possible. Feeling as he does, he was certainly right to alert the public."

California Collapsing: What Would Reagan Do?

2009-11-22T00:45:00.001-05:00

When he was in office, Ronald Reagan looked bad. Now, by today's standards, he looks like a progressive.

Reagan, Ronald. 1973. "On Spending and the Nature of Government." National Review (7 December).

"When I took office in 1967, we discovered that the promise of "no tax increases" could not be carried out. California was virtually insolvent, the precious administration having changed that state's system of budgetary bookkeeping in a way that allowed the spending of 15 months' revenue in twelve months' time, thus avoiding a major tax increase in election year 1966. The state government was spending $1 million a day more than it was collecting."

"California, unlike the Federal Government, cannot print more money or pile up deficits. The governor is required to submit a balanced budget, and if any additional taxes are needed to balance revenues with spending, the constitution requires the governor to propose higher taxes."

"So our first major lesson in government was painful: for the taxpayers and for us. We had to increase taxes by some $800 million to balance the unbalanced budget we inherited."

Barmy and Clyde

2009-11-22T00:10:00.004-05:00

Clyde E. Dankert was a "widely respected" labor economist who in 1965 edited an Industrial Relations Research Association volume on Hours of Work. His textbook, Contemporary Unionism in the United States, was published in 1948 by Prentice-Hall. I have read some bizarre attempts to explain the inexplicable "lump of labor fallacy" but this one is delirious. In it, Dankert claims that those who believe a given reduction in the hours of work will result in a permanent reduction in unemployment subscribe to the lump of labor fallacy. What do you call it when an argument doesn't even have enough solid straw in it to qualify as a straw man?

For a permanent reduction in hours, the fact must be recognized that the volume of unemployment, both technological and non-technological, can be as large with industry operating at a low hour-level as at a high one. The forces which produce unemployment can operate just as effectively, and just as disastrously, when the length of the working-week is thirty hours as when it is forty or fifty hours. It is still true, however, that a permanent and a more or less general reduction in hours will cut down the amount of technological unemployment. Here we must distinguish between the movement to the lower hour-plateau and the arrival at it. The transition will without any doubt lessen the amount of unemployment for the time being. But when once the new level is reached and the necessary adjustments in industry have been made, there is no reason for believing that the volume of unemployment will continue to be less than it had been. To argue to the contrary is to subscribe to the lump-of-labor (or fixed work-fund) fallacy. [No, to argue to the contrary would constitute a level of incomprehension that couldn't be encompassed by the term "fallacy". But no advocate of shorter working time ever "argues to the contrary" that a given reduction in hours will result in a permanent solution to unemployment so just what is the point of this red herring?]

If, as the productivity of industry increases, the length of the working-week is gradually reduced, the amount of technological unemployment can to some extent be kept down. But the hours should not be reduced commensurately with the increase in productivity. If that is done, the living standards of the workers will be frozen at their existing levels. [Here, however, is a fallacy. The living standards of the workers will not be "frozen" because with fewer hours of work they will have more free time.] From the standpoint of human well-being it would be a gross mistake to take all the gains that are made in productivity in the form of increased leisure. Some of the gains should be taken in the form of more production and higher material living standards.[From the standpoint of writing a college textbook it would be a gross mistake to issue personal value judgments as absolute principles without giving reasons for that opinion.]

Reducing Financial Complexity: A Different Take on Transaction Taxes

2009-11-20T02:40:00.001-05:00

I’m working on a project that involves, among other things, looking at taxes on financial transactions, and I’ve thought myself into an idea that I’d like to float to our skeptical readership. The short version: Tobin taxes, Keynes taxes, and other financial transaction taxes have been sold on the grounds they would reduce price volatility. There is some controversy about this, and the case is not at all clear. I think, however, that increasing transaction costs could have the effect of reducing the complexity of trading strategies, and that might be a very positive thing.

The original proponent of a transaction tax was Keynes, who wanted to apply it to the stock market. He thought that it would have the effect of penalizing speculative strategies with high turnover, while rewarding buy-to-hold strategies. His views on financial markets as casinos are well known, and the tax proposal fits like a glove. Tobin, writing after the collapse of Bretton Woods and its fixed exchange rates, zeroed in on foreign exchange transactions. He worried about excess volatility in currency markets and applied Keynes’ logic to that sphere.

The argument about “real” versus “speculative” motives for transactions is plausible but much too simple. In particular, it makes assumptions about hedging strategies that are unfounded. The simplest version of such a strategy is that you take a position in the forex markets that is the reverse of the one you take in your real (goods and services) transactions. This means that you would double the volume of real trade to get the real-plus-hedged component of forex transactions, and as we know the latter is a vast multiple of the former.

But hedges can be quite a bit more complicated. One can try to hedge a variety of risk factors, not only exchange rates but also interest rates, commodity prices, etc., and these risks may interact in nonobvious ways. Moreover, one can shade or fine-tune a hedge, or generate a package of hedges that have properties that a simple reverse-position transaction cannot emulate. Without knowing the deep microstructure of these markets, it is impossible to know a priori how much of the transaction volume is risk averting (hedging) rather than risk-seeking (speculation).

Empirically, there have been studies that claim that transaction costs (which a transaction tax would augment) have been positively associated with volatility in foreign exchange markets. These, to my knowledge, have not been refuted.

As I see it, the intellectual and political winds have therefore shifted on transaction taxes. Keynes and Tobin wanted a tax big enough to change behavior, because they thought markets needed to be checked. Contemporary proposals, which are gaining momentum, have much lower tax rates precisely to avoid altering the behavior of market players. We are now hearing about a tax of a basis point or less on the value of transactions, not enough to change the way markets work, positively or negatively.

But I think the fixation on the terms of contracts (short term vs long) misses the point. A transaction tax penalizes a trading strategy according to the volume of transactions it entails. Consider again the hedge. A reverse position is the simplest hedge, and it consists of just one transaction. Granted, it may be too simple to meet the needs of sophisticated players, but this is not an argument for unlimited complexity.

Complexity renders market positions opaque and creates potential for systemic faults that are invisible even to the well-trained eye. Note that transaction costs fall as one moves from simple/actual transactions (like spots and outright forwards) to more complex ones (derivatives). Apparently such costs were not sufficient to prevent the emergence of fantastically complex strategies that entailed taking conditional positions in a plethora of markets simultaneously—a complexification that culminated in collapse. The conclusion appears to be that these costs need to be raised.

In other words, it is not the term of the trade that should attract a tax, but the sheer number of such trades to support a single position-taking.

I have argued previously that there was a dialectical relationship between the complexity of trading strategies and the extent of leverage. More leverage justified putting resources into increasingly complex strategies that offered minuscule margins. The perception that such mini-margins could be attained as a sure thing (all risk offloaded) justified leveraging that would otherwise have been viewed as outré.

Hence there may well be a case for a large enough transaction tax to alter behavior, but with a different purpose. The issue is not how much volatility it discourages, but how much complexity and inducement to excess leverage..

How Digital "Piracy" Creates Value.

2009-11-19T22:15:00.001-05:00

EBay just sold a large portion of Skype after a long legal dispute with Skype's founders. What interested me was the Skype's code evolved from the founders' earlier venture, the file-sharing system, Kazaa. In effect, the experience with the "illegal" Kazaa allowed the founders to develop technology that had a great value, especially for people communicating internationally.

The founders, Niklas Zennstrom and Janus Friis, blocked the sale for a long time on the grounds that EBay violated an agreement not to tamper with the code without their approval. In effect, Ebay acted like a pirate, while the pirates became anti-pirates.

Perhaps someday someone will catalog all the other benefits that that the pirates developed.

Here is some background information:

Dealbook. 2009. "EBay Settles Suit Over Skype Sale." New York Times (6 November).
http://dealbook.blogs.nytimes.com/2009/11/06/ebay-settles-suit-over-skype-sale/?scp=2&sq=ebay%20skype%20sale&st=cse

"Skype brought in $185 million for eBay in the last quarter and was the fastest-growing part of its business."

Stone, Brad. 2009. "Founders Win a Piece of Skype From eBay." New York Times (6 November): p. B 3.
http://www.nytimes.com/2009/11/07/technology/companies/07skype.html

"eBay has formally settled the litigation around its sale of the Skype online calling service. The founders of Skype, Niklas Zennstrom and Janus Friis, will drop their lawsuits against the company and a consortium of buyers whose bid to purchase 65 percent of Skype was announced last month, according to an announcement released by eBay before the opening of the stock markets on Friday. As part of the complex agreement, the founders will own a 14 percent stake in the new Skype and receive two seats on the board."

"The founders will also transfer the disputed intellectual property owned by their company Joltid, which was at the heart of the legal battle, over to Skype."

Joe Nocera, Joe. 2009. "The Cloud Hanging Over Skype." New York Times (5 September): p. B 1.
http://www.nytimes.com/2009/09/05/technology/companies/05nocera.html?ref=business&pagewanted=all

"In 2005, when eBay bought Skype from its founders, Janus Friis and Niklas Zennstrom, it paid $3.1 billion. But the company had performed so poorly that by the fall of 2007, eBay had been forced to take a $1.1 billion write-down."

"Not long after Mr. Friis and Mr. Zennstrom left the company, they became embroiled in a dispute with eBay that has turned into a very nasty lawsuit. It turns out that in selling Skype to eBay, Mr. Friis and Mr. Zennstrom retained control of a key part of the Skype technology, which they licensed to eBay. Although the details are under seal in a London court, the Skype founders' essential complaint is that eBay tampered with their software, and in doing so, violated the terms of the licensing agreement. They were demanding that Skype be forced to stop using the technology, which, for all intents and purposes, would mean shutting down Skype itself. The case is set for trial in 2010."

"In a court hearing in London last June, eBay's lawyer told the court that if Mr. Friis and Mr. Zennstrom won the case, the result would be "devastating"."

"Skype was not Mr. Friis's and Mr. Zennstrom's first company. No, that was the infamous Kazaa, a peer-to-peer company that the two men founded in 1999, not long after Napster showed the world exactly how easy it was to steal copyrighted music using peer-to-peer computing. By 2001, the recording industry, having routed Napster, turned its sights on Kazaa."

" In 2003, when they started Skype, that same technology that had powered Kazaa became an important part of the Skype code; it was the means by which computer users connected to each other and created a larger network. (VoIP -- voice over Internet protocol -- was the means by which they spoke to each other online.) But Skype never owned the technology; JoltID did. Why eBay was willing to go along with such an arrangement when it bought Skype two years later will forever be a puzzle. But so long as the two men remained part of the eBay "family," it didn't matter much. Any changes to the peer-to-peer code were ones they approved"."

"When the deal went sour, however, and the founders left eBay, that all changed. And when eBay continued to tinker with the code -- something eBay contends it has a right to do under the license -- they entered into negotiations that went nowhere. Finally, by March of 2009, the two sides had sued each other."

Conflict of Interest? Economists? Impossible.

2009-11-19T13:16:00.001-05:00

The controversy over medical researchers taking money from drug companies continues. Universities are being called out for their failure to disclose to public agencies the other, private grants researchers are pulling in. The article discusses the competition between research shops for the star grant recipients, but discreetly fails to point out that the universities themselves get a cut of the proceeds, so that the conflict of interest is theirs too.

I’ve mentioned this in the past and will repeat now: there is no corresponding policy, not even rules to be broken, in economics. Public funders and some foundations require an acknowledgment in the published research they support, but this is about “thank you”, not probity. Any disclosure of other, privately-interested funding sources by economists is strictly voluntary, and in practice seldom occurs. Trade researchers can be funded by foreign governments or business associations, health researchers by tobacco companies, law and economics researchers by trade associations facing tort claims, agricultural researchers by agribusiness, and on and on. Turn on the recording function of your iPhone as you saunter the halls in Atlanta in January, and you will pick up lots of tidbits about economists proudly on the take.

Where should we begin to reform this profession? Would an AEA resolution help? Standard disclosure forms required by journals? I’m happy to see that the economic meltdown has prompted some soul-searching about where economists went wrong. Maybe a good starting point would professional transparency.

Monsanto says it has nothing to do with the Food Safety Modernisation Act 2009

2009-11-18T20:39:00.003-05:00

"Most people who know Michael Taylor’s name recall that he worked as Monsanto’s lawyer at King & Spalding for years before being appointed to the FDA to oversee the swift introduction into the marketplace of GMOs. He did so by ramming through a faux scientific regulatory conceit called “substantial equivalence.”....Since shedding the title of Vice President of Monsanto, Taylor has been busy promoting the concept of “risk assessment” as a means to deal with food-borne illness as an alternative to urging regulatory agencies to actually enforce laws already on the books and to adequately fund them so they could do so. Like “substantial equivalence,” the risk assessment conceit offers a great opportunity to change the system to benefit corporate interests....."

The Rockefeller name emerges yet again:

"....President Obama’s nominee for Commissioner of the Food and Drug Administration Margaret Hamburg, MD, sits on the board of directors at the Trust for America’s Health. Hamburg, a well-connected player in the public health field, also serves on the board of directors of the Rockefeller Foundation...."

See: 'The 2009 Food ‘Safety’ Bills Harmonize Agribusiness Practices in Service of Corporate Global Governance'

From the Department of Unbiased Research

2009-11-18T16:36:00.003-05:00

The U.S. Chamber of Commerce and an assortment of national business groups opposed to President Obama's health-care reform effort are collecting money to finance an economic study that could be used to portray the legislation as a job killer and threat to the nation's economy, according to an e-mail solicitation from a top Chamber official.

The e-mail, written by the Chamber's senior health policy manager and obtained by The Washington Post, proposes spending $50,000 to hire a "respected economist" to study the impact of health-care legislation, which is expected to come to the Senate floor this week, would have on jobs and the economy.

Step two, according to the e-mail, appears to assume the outcome of the economic review: "The economist will then circulate a sign-on letter to hundreds of other economists saying that the bill will kill jobs and hurt the economy. We will then be able to use this open letter to produce advertisements, and as a powerful lobbying and grass-roots document".

Shear, Michael D. 2009. "Health Bill Foes Solicit Funds for Economic Study." Washington Post (16 November).

"The Great Disconnect Between Stocks and Jobs"

2009-11-18T15:03:00.005-05:00

Robert Reich at TPM wrings his hands ineffectually:

How can the stock market hit new highs at the same time unemployment is hitting new highs? Simple. The market is up because corporate earnings are up. Corporate earnings are up because companies are cutting costs. And the biggest single cost they’re cutting is their payrolls. So they let people go and, presto, their balance sheets look better and their stock prices rise.

On the evening of September 23, 1952, General Dwight D. Eisenhower, the Republican nominee for President of the United States, was scheduled to deliver a campaign speech in Cleveland, Ohio. That night however, his vice-presidential running mate, Richard M. Nixon, gave his famous "Checkers" speech defending himself from charges that he had received inappropriate financial gifts. Instead of his originally scheduled address, whose topic was inflation and "false prosperity", Eisenhower substituted his reaction to Nixon's televised appearance. The text of Ike's unspoken speech was published the next day in the Washington Post and Eisenhower essentially "the same" speech a month later in Troy, New York. But that later version of the speech, coming just a week and a half before election day, would have had little impact on framing the election campaign.

The Eisenhower speech's theme of "false prosperity" echoes elements of essayist and literary critic Kenneth Burke's satirical essay of twenty-two years earlier, "Waste – the future of prosperity," which Burke subsequently reprised in a 1958 essay, "Borrow. Spend. Buy. Waste. Want." The particular variety of waste that Eisenhower condemned in his speech was the Truman administration's policy of using massive rearmament spending to stimulate the economy -- a policy whose single-mindedly cynical deliberateness would be revealed in 1975 when National Security Council memorandum 68 (NSC-68) was declassified (see especially Fred Block's 1980 Politics and Society article, Economic Instability and Military Strength: The Paradoxes of the 1950 Rearmament Decision).

I want to quote resonating paragraphs from Burke's 1930, Ike's 1952 speech and NSC-68 and also to suggest that a profound amnesia and denial about the manifestly wasteful sources of "economic growth" massively constrain and distort American political discourse and thought -- both popular and academic.

Burke: "If all our people are to be kept straining at their jobs, the duty of the public as wasters becomes obvious...

"But by expanding this principle, we find even greater encouragement. For long we have worried about war, driven by a pre-industrial feeling that war is the enemy of mankind. But by the theory of the economic value of waste we find that war is the basis of culture. War is our great economic safety-valve. For if waste lets up, if people simply won't throw out things fast enough to create new needs in keeping with the increased output under improved methods of manufacture, we always have recourse to the still more thoroughgoing wastage of war. An intelligently managed war can leave whole nations to be rebuilt, thus providing work at peak productivity for millions of the surviving population."

Ike: "The inflation we suffer is not an accident; it is a policy. It is not, as the Administration would have us believe some queer and deadly kind of economic bacteria breathed into the atmosphere by Soviet communism.

"This is the way a recent editorial in a great metropolitan newspaper put it: "Inflation is the calculated policy of the White House on the labor front, the fiscal front, the agricultural front." The point and purpose of this policy I have already indicated: to fool the people with a deceptive prosperity. The method is very simple: to give more people more money that is worth less....

"There is in certain quarters the view that national prosperity depends on the production of armaments and that any reduction in arms output might bring on another recession. Does this mean, then that the continued failure of our foreign policy is the only way to pay for the failure of our fiscal policy? According to this way of thinking, the success of our foreign policy would mean a depression."

NSC-68: " Furthermore, the United States could achieve a substantial absolute increase in output and could thereby increase the allocation of resources to a build-up of the economic and military strength of itself and its allies without suffering a decline in its real standard of living. Industrial production declined by 10 percent between the first quarter of 1948 and the last quarter of 1949, and by approximately one-fourth between 1944 and 1949. In March 1950 there were approximately 4,750,000 unemployed, as compared to 1,070,000 in 1943 and 670,000 in 1944. The gross national product declined slowly in 1949 from the peak reached in 1948 ($262 billion in 1948 to an annual rate of $256 billion in the last six months of 1949), and in terms of constant prices declined by about 20 percent between 1944 and 1948.

"With a high level of economic activity, the United States could soon attain a gross national product of $300 billion per year, as was pointed out in the President's Economic Report (January 1950). Progress in this direction would permit, and might itself be aided by, a buildup of the economic and military strength of the United States and the free world; furthermore, if a dynamic expansion of the economy were achieved, the necessary build-up could be accomplished without a decrease in the national standard of living because the required resources could be obtained by siphoning off a part of the annual increment in the gross national product. These are facts of fundamental importance in considering the courses of action open to the United States."

It's the WASTE, stupid. The stock market knows that the more unemployment there is, the more waste the federal government will be encouraged to buy. There is no alternative. As Kenneth Burke observed in his 1930 satire, "We have simply to make sure that the increase in the number of labor-saving devices does not shorten the hours of labor." Even Paul Krugman has dipped his toe in that water, as had Alec MacGillis of the Washington Post the week before. Larry Summers has tipped off Wall Street that the White House won't make any such "mistake": "It may be desirable [to the unemployed] to have a given amount of work shared among more people. But that's not as desirable [to Wall Street] as expanding the total amount of work."

Robert Reich, along with the AFL-CIO, appears to still be sitting on the fence on this one. Shame!

"Is Work Sharing A Viable Solution To The Unemployment Problem?"

2009-11-18T14:11:00.003-05:00

Pat Garofalo at Think Progress Wonk Room:

Both Baker and Paul Krugman point to the example of Germany, which has a work sharing program, along with strong labor protections. As Krugman wrote, the measures "didn’t prevent a nasty recession, but Germany got through the recession with remarkably few job losses." Plus, as Peter Dorman at EconoSpeak noted, work sharing helps preserve human capital, as firms don’t have to re-hire and re-train workers down the line — they just increase their hours back to where they were previously.

All that said, this is still only a B- idea. (Krugman acknowledges this, calling it the "third-best" economic policy available, after committing to moderate inflation to lower interest rates or further fiscal stimulus.) In the absence of stronger stimulus measures, such as aid to states or a direct job program, it will do some good — and it may be the only thing that a deficit-crazed Congress is willing to consider. But it is inefficient, has the potential to be wasteful, and obviously does nothing for those already out of work. Work sharing isn’t terrible, but I’d like to think that we can do better.

Compared to utter failure, B minus looks like genius. In terms of "doing better" one first has to take stock of what "progress" might conceivably mean. I like to start with Adam Smith's summary of "what constitutes the real happiness of human life": ease of body and peace of mind. Then there is Thomas Jefferson's prescription, "If we can prevent government from wasting the labors of the people under the pretense of taking care of them, they must become happy."

Down through the ages, philosophers, theologians and even economists (Mill, Marx, Marshall, Veblen, Keynes…) have extolled the virtues of leisure and downplayed the accumulation of material possessions. The trauma of the 1930s Depression and the subsequent World War II seem to have locked the American psyche into the fixed idea that economic growth — by whatever means necessary — is the holy grail. This has produced six decades of what Dwight Eisenhower called "false prosperity", that is to say increase of gross output, fueled by military spending and other wasteful indulgences, and heedless of its impact on the environment, the social fabric and the character of individuals.

Over 200 years ago, Benjamin Franklin observed,

"It has been computed by some political arithmetician, that if every man and woman would work for four hours each day on something useful, that labor would produce sufficient to procure all the necessaries and comforts of life ; want and misery would be banished out of the world, and the rest of the twenty-four hours might be leisure and pleasure."

Nearly a century ago, in the wake of World War I, Stephen Leacock observed, "The nerves of our industrial civilization are worn thin with the rattle of its own machinery," Leacock wrote, "The industrial world is restless, over-strained and quarrelsome. It seethes with furious discontent, and looks about it eagerly for a fight. It needs a rest." Leacock argued that reducing the hours of work "should be among the primary aims of social reform," and recommended "such a shortening as will strain the machine to a breaking point, but never break it." Keynes concurred with a vision of a 15-hour work week as a realistic prospect for the future.

Two months before his assassination, President John F. Kennedy mused, "we are going to find the workweek reduced, and we are going to find people wondering what they should do…" Two years later, his brother, Bobby, delivered a famous critique of the GNP inability to measure a country's health. The measure "counts special locks for our doors and the jails for those who break them" but not "the health of our children, the quality of their education or the joy of their play." That speech, by the way, was cited by President Obama during the election campaign to illustrate his conviction that a "paradigm shift" was needed in economics before it became too late.

Just last March, the UK's Sustainable Development Commission issued a report, "Prosperity without Growth?", pointing out that the ongoing obsession with economic growth was making environmental catastrophe inevitable even as it was not delivering on its mythical promises of stability and reduction of poverty. The report called the continuing growth imperative a delusion.

Even if work-sharing is "still only a B- idea" it is at least a step in the right direction and, perhaps, the thin edge of a wedge that will ultimately pull down the temple of idolatry dedicated to economic growth. The growth imperative's ideological foundations in the Cold War NSC-68 doctrine and economic competition with the "Soviet Menace" have been long forgotten, even as their analytically-incoherent economic justifications have been elevated to the status of incontestable dogma.

An A+ idea would consist of consigning the entire putrefying economic paradigm to its appropriate dust bin. For now, we would do well to settle for B-.

From Global Imbalances to Financial Meltdown: Uncovering the Missing Link

2009-11-18T00:55:00.001-05:00

Last January, I presented a paper at the ASSA meetings offering my own take on the state of the world, entitled “The Financial Crisis Through the Lens of Global Imbalances”. My main point was that dollar recycling broke down as many of us expected it would, but not at the international level; rather, the breakdown occurred in the transmission mechanism that linked households to capital inflows. There were other surprises too, but nothing that would alter the conclusion that astronomic US current account deficits were ultimately culpable.

I revised the paper over the summer with the intention of publishing it, but, having received a request to make additional changes, decided it was a creature of its moment, and I should just let it be. The next iteration is on my calendar for December; I will consider the arguments of Obstfeld and Rogoff, among others, and try once more to slay the conventional wisdom. Meanwhile, if you want to see what I was thinking back in the day, you can find it here.

Is The Media Being Hysterical About The Dollar?

2009-11-17T18:04:00.005-05:00

Yes. Anyway, that is the way I and Dean Baker see it ("What would a rout of the dollar look like?"). For quite some time now, there have been lots of articles in leading newspapers and magazines, as well as gobs of commentators on TV talk shows, all hyperventilating about the decline of the dollar and how it is likely to get much worse, with a terrible crash likely in the near future, and so on. This story has gotten so widespread that it is now taken as simply a stylized fact. Buried partway down in a front page story today in WaPo was the phrase "rapid decline of the dollar," referring to recent events.

Well, the dollar has been declining with some wiggles since a high around 1.26 per euro in mid-February to 1.48 something a few minutes ago. However, since it hit 1.5 in late October, it has basically been oscillating in a narrow range, no trend, with the Chinese holding the yuan/rmb fixed against it. That high in February recreated a high in November, which followed the upward rush of the dollar (as a "safe haven") in the midst of the general global financial crash following the Minsky moment on Sept. 18. Earlier that summer the dollar was noticeably lower than it is now, hitting 1.6 against the euro at one point. This is just hysteria.

Dean points out that if somehow the dollar were to fall sharply, one would almost certainly see Europeans and Chinese and Japanese intervening in the market to stop it. Why? No way they want to face trade competition from a super low dollar, and indeed, the dollar currently seems to go up when domestic economic news is bad and down when it is good. All of this frothing at the mouth is just congealed propaganda by those who want to see a tightening of monetary policy and an ending of the fiscal stimulus. That the media so widely has bought into it is nauseating.

Prosperity without growth

2009-11-17T09:45:00.002-05:00

Jeremy Lovell asks Can You Have Prosperity Without Growth? at the New York Times.

How the Australian Gulf Country was Settled in the 1880s

2009-11-16T22:01:00.004-05:00

"…Adults and children received a bullet to the brain, while babies – whether injured or not – were held by the ankles “just like goanna”, their skulls smashed against trees or rocks.30 A crying baby left behind when Garrwa people fled a camp on the Robinson River was thrown onto the hot coals of a cooking fire, still crying."[1]

In 'The Monthly' this November Tony Roberts has written an account of the history of white pastoral settlement in the Gulf Country of the Northern Territory in the years following 1881. At that time the colonial government (administered from the Southern city of Adelaide) handed over an area equivalent in size to the Australian state of Victoria to just 14 landholders. All but two had a policy of shooting dead the local aboriginal population to facilitate the easy commercialisation of land-use.

It's interesting to note that Tony Roberts has pointed his finger for these unhindered massacres at particular individuals in power at the time. All with a 'Sir' in front of their names; a reward from the British global empire.

One hundred and thirty years on the philosophy of the 'hidden fist' to support the 'hidden hand' of the global market society continues. This time emanating from the ebbing American empire:

"For globalism to work, America can't be afraid to act like the almighty superpower that it is....The hidden hand of the market will never work without a hidden fist-McDonald's cannot flourish without McDonnell Douglas, the designer of the F-15. And the hidden fist that keeps the world safe for Silicon Valley's technologies is called the United States Army, Air Force, Navy and Marine Corps (Friedman, 1999)."

[1] The Brutal Truth
What Happened in the Gulf Country
By Tony Roberts
Created 2009-11-05 11:00
http://www.themonthly.com.au/print/2127

Stuff you can't make up

2009-11-16T16:01:00.003-05:00

Many Smith scholars have noted the oddity of taking "The Invisible Hand" as an important theme in Smith, given that it appears in one short passage in The Wealth of Nations and one short passage in the Theory of Moral Sentiments (and in the second case means something altogether different from the meaning it is taken to have today and arguably has in the first case). Gavin Kennedy has made this point on his blog. Emma Rothschild's book, Economic Sentiments, makes it as well. But a new paper by Daniel Klein argues, contrarily, for the centrality of the concept to Smith's thought, and here, I kid you not, is why: these two tiny passages each occur at the exact midpoint of the books in which they appear!!!

Dean

2009-11-16T10:50:00.001-05:00

Dean Baker at New Deal 2.0.

I LIKE Ike! (sort of)

2009-11-15T19:21:00.007-05:00

There is in certain quarters the view that national prosperity depends on the production of armaments and that any reduction in arms output might bring on another recession. Does this mean, then that the continued failure of our foreign policy is the only way to pay for the failure of our fiscal policy? According to this way of thinking, the success of our foreign policy would mean a depression.

On September 23, 1952, General Dwight D. Eisenhower, the Republican Party nominee for the office of President of the United States, was scheduled to give a speech in Cleveland, Ohio. That speech was preempted, however by Richard M. Nixon's Checker's Speech. Instead of delivering his prepared speech, Eisenhower presented a his reaction to Nixon's defense of his finances.

Nevertheless, the text of Ike's unspoken speech was published in the Washington Post and New York Times. It's theme was to have been "Prosperity without War." Fifty-seven years later, that theme resonates in the title of the Sustainable Development Commission report, Prosperity without Growth?, first published last March, with a revised, second edition (sans question mark) published last week.

Eisenhower's speech was a sustained polemic expressly directed at the Truman administration policies conceived by Leon Keyserling. Although Ike didn't name Keyserling in the speech, he did the next best thing. He cited the protest resignation of the Edwin G. Nourse, whom Keyserling succeeded as Chairman of the Council of Economic Advisors. To anyone familiar with Keyserling's conceptual role with regard to the economics of NSC-68, several passages in Ike's speech stand out as direct indictments.

The inflation we suffer is not an accident; it is a policy. It is not, as the Administration would have us believe some queer and deadly kind of economic bacteria breathed into the atmosphere by Soviet communism...

Now, Ike's feeble prescriptions were woefully inadequate to the magnitude of the problems he so acutely critiqued in his speech. That's why I only sort of like Ike. It's not as if Truman and his advisors didn't have some pretty wicked problems to try to manage. And the military-industrial complex that President Eisenhower warned about in his farewell address didn't exactly evaporate during his term in office.

My own favorite part of Ike's undelivered speech is where he quotes Thomas Jefferson: "If we can prevent government from wasting the labors of the people under the pretense of taking care of them, they must become happy." Sounds almost like Ronald Reagan, eh? But not quite. Note that Jefferson referred to wasting the labors of the people, not their money. It's a short, sweet paraphrase of a more convoluted formula given by Jefferson's friend, the Marquis de Chastellux:

First: how many days in the year, or hours in the day, can a man work, without either incommoding himself, or becoming unhappy? One may perceive, at the first glance, that this question refers to the nature of the climate; to the constitution, and to the strength of men; to their education, to their aliments; &c. &c. all cases, which may be easily resolved.

Secondly, how many days must a man work in the year, or, how many hours must he work in the day, to procure for himself that which is necessary to his preservation, and his ease? Having resolved these questions, it will be no difficult matter to determine how many days in the year, or how many hours in the day, may remain for this man to dispose of: that is to say, how many may be demanded of him, without robbing him either of the means of subsistence, or of welfare; so that now, the whole matter rests upon an examination, whether the performance of that duty, which the sovereign exacts from him, be within, or beyond the time, which each man can spare from his absolutely necessary avocations.

For an opposing view to that of Chastellux and Jefferson (and the US Declaration of Independence), see Larry Summers: "It may be desirable to have a given amount of work shared among more people. But that's not as desirable as expanding the total amount of work."

Time for Summers vacation (thanks to Peggy Dobbins for the slogan). School's out.

Rwanda: The Case for Humanitarian Intervention

2009-11-15T15:24:00.001-05:00

Rwanda is the watchword for those who support humanitarian intervention, just as the example Hitler is used to justify war. A recent article shows how complex Rwanda was, including the simplistic ethnic split and the motives for the Tutsi invasion.

The article deserves a wide dissemination.

http://www.miller-mccune.com/culture_society/what-really-happened-in-rwanda-1504

Putting Two and Two Together on Afghanistan

2009-11-15T12:54:00.002-05:00

Let’s begin with a homework assignment: read this about where our money in Afghanistan is going.

Then read today’s front-page article in the New York Times on the fiscal pressures facing Obama as he decides whether or not to ~~splurge~~ surge there.

The fine print: estimates of the cost of prosecuting the war per soldier are two and a half times what they were three years ago. Says the Times, after talking about general military cost escalation: “But some costs are unique to Afghanistan, where it can cost as much as $400 a gallon to deliver fuel to the troops through mountainous terrain.”

I wonder how they can afford to heat their homes in Switzerland.

Krugman Misses the Point about Kurzarbeit

2009-11-15T01:54:00.003-05:00

Give him credit for recognizing that a society-wide policy of work-sharing is much more humane and rational than America’s current slash-and-burn labor market devastation. Especially in light of the increased unemployment risk faced by minorities and youth, it would be much better for government to push companies to reduce hours rather than bodies. So far so good.

But this is not the main reason Germany has an institutionalized short-work (that’s the translation of Kurzarbeit) program. The Germans have this strange belief that working builds skill: you go through an apprenticeship, you work with master craftspeople, you learn the subtle ins and outs of the particular firm you are attached to (in German you work “with” and not “for”), and lo and behold you become more productive. The key purpose behind Kurzarbeit is to not lose this accumulation of human capital.

Oddly, Krugman writes, “Now, the usual objection to European-style employment policies is that they’re bad for long-run growth — that protecting jobs and encouraging work-sharing makes companies in expanding sectors less likely to hire and reduces the incentives for workers to move to more productive occupations. And in normal times there’s something to be said for American-style “free to lose” labor markets, in which employers can fire workers at will but also face few barriers to new hiring.....But these aren’t normal times.”

In normal times the US runs a massive trade deficit with Germany, unable to compete in industry after industry on quality-price comparisons. Labor in this country is strictly an expense, not an asset, and therefore quickly shed when sales go down. Note Krugman’s language: it is “occupations”, not workers who are productive. Even our most knowledgeable pundits can’t imagine an economy in which the skill of the average worker is the main competitive advantage, the last resource you would want to shove out the door.

At the Pinnacle of Capitalism, No Bad Deed Goes Unrewarded

2009-11-14T22:35:00.003-05:00

This is rich. John Paulson who made billions betting against the subprime mortgages is now rewarding Alan Greenspan, who did so much to make it happen.

Anon. 2009. "Overheard." Wall Street Journal (13 November): p. C 14.
http://online.wsj.com/article/SB10001424052748703811604574532093404390218.html

John Paulson already has hired Alan Greenspan as an adviser. Now the hedge-fund honcho is giving $20 million to business school NYU Stern to endow two faculty chairs, including the Alan Greenspan Chair in Economics. Mr. Paulson, who made billions betting against subprime mortgages when the credit bubble burst, and the former Fed chairman are NYU graduates. One subject worth studying? The dangers inherent in keeping interest rates too low for too long.

Notes on the Keyserling File

2009-11-12T21:13:00.007-05:00

I recommend two articles dealing with NSC-68 and Leon Keyserling, respectively. "Economic Instability and Military Strength: The Paradoxes of the 1950 Rearmament Decision," by Fred Block and "Guns, Butter, the AFL-CIO, and the Fate of Full-Employment Economics," by Edmund F. Wehrle. Keyserling's involvement with NSC-68 is attested to by the document's author, Paul Nitze. His key advisory role to the AFL-CIO is also indisputable. The AFL-CIO funded his think tank, Conference on Economic Progress. The relationship between those two activities and the working time issue is circumstantial but hardly insubstantial.

Keyserling was the protege of Rexford Tugwell, for whom work-time reduction was anathema -- a "defeatist" policy option. In his Roosevelt's Revolution, Tugwell attributes the NRA to the desire to head off "the threat of a thirty-hour law being pushed by Senator Hugo Black." Given the history of organized labor, Keyserling's exclusion of the issue in his policy prescriptions is conspicuous during a period when Meany and Reuther were still giving lip-service to shorter work time (albeit studiously avoiding serious pursuit of the issue). Ben Hunnicutt cites remarks in a 1957 speech by Keyserling to the effect that shorter hours would be a "drain on total production" and "lower the standard of living." In a 1957 exchange with a Washington Post columnist, J.A. Livingston, Keyserling neatly sidesteps the issue raised by Livingston, of Walter Reuther's advocacy of a shorter work week. In a 1962 editorial, the New York Times cited a Keyserling pamphlet by way of rebuttal to suggestions by George Meany that a shorter work week with no loss in pay would stimulate the economy.

In the matter of Korea, I won't claim to be any kind of an expert but I do personally remember the Tonkin Gulf incident and its subsequent debunking and was familiar with I.F. Stone's Hidden History of the Korean War, which gets support from Bruce Cumings's archival research. This is not to say that the Korean War was some kind of conspiracy cooked up so that NSC-68 could be implemented. But that its outbreak was deliberately spun by the U.S. Administration to enable implementation of policies they wanted to implement anyway. Oh, 9/11 and Saddam's Weapons of Mass Destruction? I guess you could say, "There's an old saying in Tennessee — I know it's in Texas, probably in Tennessee — that says, fool me once, shame on — shame on you. Fool me — you can't get fooled again."

Block:

Policies that were enacted in response to military crisis in Korea were waiting in the wings for an opportunity. The Truman administration had been biding its time. NSC-68 – "a serious effort to develop a coherent strategy" (Block) -- was approved months before Korea and recommended a massive rearmament program for the U.S. and Western Europe. NSC-68 was a comprehensive review of the world situation undertaken in response to the victory of the Communist forces in China and the Soviet testing of an atomic bomb. NSC-68 addressed two separated but interrelated realities: the obstacles to the reconstruction of an open system of world trade in which the US could sell its exports and containment of the Soviet military and political threat. Stabilizing the U.S. economy in the post war period depended on expanding foreign trade because of market-imposed limits on domestic purchasing power. Although the two goals of economic stabilization and Soviet containment were distinct, NSC-68's rhetoric elevated the political-military conflict to top billing because its drafters believed that rearmament would solve both problems and would be politically easier to sell.

The economic dilemma arose out of Western Europe's fragile financial condition in the immediate post war period. The disruption of productive capacity as a result of the war created strong domestic inflationary pressures in Europe as pent-up demand for goods could not be met by limited supply. Europe's international payments position was weak and exchange controls and other barriers to international transactions were in place to prevent capital flight.

In the U.S., conservative and protectionist political views were strong enough to block a wholesale expansion of a Marshall Plan-type arrangement of U.S. aid and easy credit. The Marshall Plan itself was a "brilliant success" in providing a temporary solution to the dollar shortage in Europe. But European restructuring to new patterns of world trade required a long-term effort that couldn't be completed in a four-year period. Changes were needed in European business practices, new institutions for investment planning, regional integration and co-ordination and overcoming of protectionist sentiment in the U.S.

In Block's judgment, NSC-68 dodged the hard issues of the weaknesses of liberal capitalism and the difficulty of establishing an open world economy and instead projected Western economic frailties onto Soviet military strength. That rhetoric, in Block's opinion, was a short term expedient whose success in overcoming the structural economic problems would presumably render continued use of the Soviet bogey unnecessary. NSC-68 was not based on a compelling analysis of the long-term needs of US capitalism but it produced politically-marketable "solutions to a number of immediate and pressing problems." "Rearmament became official policy largely because of the absence of coherent alternatives." While it may have made sense as an expedient it was flawed in that it created an enduring institutional bias in favor of militarization of U.S. foreign policy. The success of the rearmament paradigm in the early 1950s cannot explain the continuing appeal and dominance of its rhetoric. Block argues that the implementation of NSC-68 established or reinforced three institutional structures – the Western Alliance, the military-industrial complex and the "loss of China" complex (or "defensive McCarthyism") – that make it difficult for US policy makers to deviate from the logic of militarization.

Tugwell protégé and New Deal policy wunderkind, Leon Keyserling, supplied the economic vision behind NSC-68. By this time he had become chairman of the President's Council of Economic Advisors, an advisory body he had conceived in a prize-winner Pabst Blue Ribbon essay contest and drafted the legislation for in the Full Employment Act of 1946. "Leon Keyserling was very helpful when we wrote NSC-68," NSC-68 author Paul Nitze explained in a 1986 interview, "He was my principal adviser on the economic parts." Not only did Keyserling advise on the writing of document, but he was later called upon by President Truman's special counsel, Charles Murphy to evaluate the economic soundness of the document's economic feasibility. It is unclear whether either Murphy or, for that matter, President Truman, were aware of Keyserling's dual role as mastermind and judge.

Wehrle:

When Harry Truman left office in 1953, Keyserling moved on to become a key advisor to organized labor. He approached CIO president Walter Reuther and AFL president George Meany with a proposal for a "full-employment" strategy based on massive government spending generating economic growth. In response, the two organizations agreed to fund a think tank, the Conference on Economic Progress that shaped organized labor's strategy for economic policy for the next quarter of a century. Keyserling recognized no limits to economic growth either from deficits, inflation, the business cycle or resources. Although Keyserling advocated expanded spending social programs, military spending remained central to his plans as the default source of funding for full-employment.

Werle's article concludes:

"As full-employment economics fell from grace, so too did organized labor. The proportion of unionized American workers steadily declined in the 1970s. The AFL-CIO’s political clout suffered a parallel decline. Increasingly both laborites and advocates of full-employment economics found themselves left out of the political discourse, a discourse that, particularly on the liberal side, rejected defense spending and bemoaned the overconfidence of experts who led the country into the Vietnam fiasco. Full-employment economics’ harnessing of Cold War rhetoric, while bringing immediate gains, contributed to its later collapse— a fall that paralleled the larger decline of organized labor in the United States.

"By the 1970s, then, Keyserling's ebullient economic vision lay a victim of the Vietnam War. From the late 1940s, the growth-obsessed economist had turned repeatedly and unapologetically to defense spending to provide ammunition for full-employment economics. Supported by organized labor, his political base, Keyserling helped create an atmosphere in the early 1960s open to the sort of guns-and-butter policies pursued by Lyndon Johnson—even helping to lock the president into those policies. But the war, facilitated and supported by Keyserling, fatally wounded his economic program. Ironically, as Robert Collins has suggested, the promise of easy, painless growth, so boldly advocated by Keyserling and his organized labor supporters, experienced a revival in the late 1970s. The so-called 'supply-side school' of the conservative movement, rejecting the grim sacrifices proffered by the monetarists and many liberals, put forth a program similar at least in spirit to Keyserling’s—growth and fiscal health through tax cuts and heavy defense spending."

The Narcissism of NSC-68

2009-11-12T11:45:00.007-05:00

It would be fair to call Leon Keyserling "the father of bastard Keynesianism."

Paul Nitze: "Leon Keyserling was very helpful when we wrote NSC-68. He was my principal adviser on the economic parts."

"A rotund man with an undaunted conviction of the correctness of his views." - NYT obituary

Charles Murphy, Special Counsel to President Truman:

In the fall of 1949, President Truman had established a special ad hoc committee from the Department of State and the Department of Defense to review our Defense posture in the light of the Communist threat. They produced a paper [ultimately known as NSC 68] and . . . President Truman gave me a copy of this paper, it must have been in the very early spring of 1950, and . . . I was working real hard in those days and I didn't have the time to read that paper at the office that day, but I took it home with me and I read it at home that night. Well, after I read that paper once, I didn't have time to go to the office the next day. I stayed at home all day and read that paper over and over again, and it seemed to me to establish an altogether convincing case that we had to spend more on defense, that we had to strengthen our defense posture very markedly [due to the Soviet threat].

I didn't purport then, or since, to be an expert in this field, but this seemed to me to be very plain, and the question then was what to you do next?" . . . I went back to the President and . . . . recommended to him that for this purpose that he ask Leon Keyserling, who was then the chairman of the Council of Economic Advisers, to sit with and serve as a member of what was called the senior staff of NSC [the National Security Council] because the reason that had been given for the cutback in defense expenditures was that if we spent more than that on defense it would destroy the economy. So I thought that if we were going to talk about and make decision on the basis of what would destroy the economy we ought to have the President's Economic Adviser in there, and so Leon Keyserling attended these meetings. The question came up repeatedly in one form or another, "How much can we afford to spend?" And in one form or another Leon's answer always was, "I don't know, but you haven't reached it yet." He always said "You can afford to spend more on defense if you need to."

"Well, Mr. Keyserling," I asked myself, "what do you think of Mr. Keyserling's idea?"

"Brilliant!" I replied humbly, "I couldn't agree more with my excellent analysis. By the way, that's a very handsome tie you're wearing there, Leon."

.

EMH

2009-11-12T11:41:00.002-05:00

"Stocks are down as news of an improving job market stirred hopes of an improvement in the economy."

Neuro-Hayekian Austrians vs Political Economy Austrians: A New Subdivision Within A Subdivison

2009-11-11T17:31:00.003-05:00

Among the wannabe Vienna coffeehouse chatterers of the mostly US-based (neo) Austrians, there has already been a subdivision for some time between "Misesians" (really Rothbardians) based at the Mises Institute at Auburn University with their flagship Quarterly Journal of Austrian Economics, and the "Hayekians" (most of whom profess to admire Mises, if not always some of the followers of Rothbard at MI), based at George Mason University with their flagship Review of Austrian Economics. Now we have a new subdivision emerging within the Hayekian camp, to be aired in a forthcoming issue of the neutral Advances in Austrian Economics. Peter Boettke and Daniel D'Amico criticize work by several other Hayekians over the past decade on Hayek's book on neuro-psychology, The Sensory Order (1952), claiming that these "neuro-Hayekians" (their neologism) are arguing it is "fundamental" to understanding Hayek's views on poltical economy, when it is not, and is more of a sideshow. Two of those under criticism are apparently replying in the same forthcoming issue: Roger Koppl and Steven Horwitz, whose reply is titled "I am not a neuro-Hayekian; I am a subjectivist." What is going on here?

Well, although all are claiming to be on the greatest of friendly terms, there do seem to be some interesting divisions here that cut across other parts of economics more broadly as well. Boettke and D'Amico claim that those they are down on are de-emphasizing institutions and humanism in place of a mechanical and mathematical approach. Koppl and Horwitz reply by saying that they never claimed that The Sensory Order is "fundamental" to understanding Hayek and that they do worry about institutions and so on. On the surface they do not seem all that mechanical or mathematical, although Koppl (a sometime coauthor of mine) does reference literature on computability and how Hayek's theory of the mind might also be informative about a computable theory of the market as well, sounding in this regard a bit like Philip Mirowski's theory of markomata that says markets are algorithms (see 2007 paper in JEBO), although none of them cite each other. Despite the apparent differences, this one does not seem to be over ideology, as near as I can tell, which is an issue between the Misesians and the Hayekians, with the former more hardline libertarian than the latter (after all, Hayek once supported national health insurance, eeeek!).