Angry Bear Select

Robert Reich's After Shock and Corey Robin's Freedom Arguments

2011-04-22T16:28:00.001-07:00

In earlier posts on ataxingmatter (here and here), I reviewed Robert Reich's 2010 book, After Shock, and wrote about his suggested cures for the problems made most visible in the 2007 crash and the Great Depression that followed.

The gist of the book is summed up in the following quote:

"[L]eft to its own devices, the market concentrates wealth and income--which is
disastrous to an economy as well as to a society." at 59

Corey Robin writes in the Nation about the same problem, Reclaiming the Politics of Freedom, The Nation, Apr. 26, 2011. But he notes that harping on the distributional inequality doesn't resonate with voters. If the left wants to influence policies and capture the hearts of voters, he suggests, it needs to demonstrate that this distributional mayhem, which leaves everybody but the rich vulnerable, has even broader consequences that reach to the very fundamental creation myths of our society--the desire to be our own masters, to free ourselves from a tyrannical monarchy and colonial overlords who seemed to want to dictate how we could work, what we could drink, and where we could live. That is, to make what we are saying comprehensible at the "yeah, that's what counts for me" level, we need to connect to America's own Founding Moment. We need to "reclaim[] the politics of freedom."

And I think he is correct. Because the problem we are facing today, with corporate lobbying and campaign contributions reinforcing the elite class's wining and dining of politicians, is more than the dysfunction of the economy. Yes, there is too much money at the top where there is not enough ability to spend it. Yes, there is too little money at the bottom where there is no way to provide for basic needs. Yes, there is barely enough in the middle, resulting in stagnation in local businesses who don't have enough customers to sell to and can't afford to give credit to those who want to buy.

It is not just that banks, connected to power through their managers and shareholders, are able to speculate with other people's money (our money!) in the international derivatives casino and then push their losses off on us. It is not just that corporate bosses rake in as much in a day as many of their workers make in an entire year of hard labor. It is not just that we can no longer talk to anybody local when there is a problem with our phone or our order from a company. It is not just that ordinary people are ignored, disregarded, almost shunned, because the elite really are only comfortable in the company of other elites. It is not just that we can't get an appointment with a doctor unless we have (expensive) health insurance, or can't get that crown we need on the broken tooth because it costs as much as some of us make in half a year.

No. These things are real, they affect us every day, they make us angry every day because we recognize our powerlessness to deal with the highly impersonal Big Business world that has been fostered by the four decades of reaganomics' deregulation, privatization, tax cuts and militarization. But still, the problem goes much deeper than these things.

Our very freedom is threatened. When we are economically powerless, we are also powerless in our lives because we lose our freedom to make choices that are right for us.

we lose our rights to bargain with our employers (look at how Wisconsin and Ohio have treated their public employees or how WalMart treats its workers and anyone who talks unions),

we lose the power to improve ourselves by pulling ourselves up by the bootstraps through publicly funded education from grade school through university,

we are dominated in the marketplace by powerful businesses that use automated systems to turn us off, ignore our calls and letters seeking redress for a mischarge or a poorly done job,

we lose our jobs, are forced to accept paycuts or furloughs, when the company claims times are tought, yet we watch the same public companies to pay their CEOs millions more

Our freedom to improve ourselves, freedom to choose the kind of work we want to do, freedom to prepare for our retirement and then retire with some security about our future, freedom from worry about whether or not a catastrophic medical emergency will eat up all our savings and leave family without an adequate living--all these freedoms are being threatened today by the concentration of wealth in the hands of an elite few who thereby become emplowered to set the market terms as they choose.

The idea of the "free market" is a bill of goods sold to replace the real concepts of freedom we should be considering. Markets, of course, can only function well for the people where government constraints prevent the owners and managers from setting all the terms to suit themselves, leaving externalities of their profitmaking to be borne by the people. literally ripping them off. The sloganeers have persuaded ordinary Americans to think that the American Dream of freedom is encapsulated in that little bitty notion of a "free market" so that they will unknowingly throw away the big idea of freedom--the freedom to set one's own course in life, in a cooperative society that works to provide those tools.

The reason we need a progressive tax policy--including at the least progressive tax rates with brackets that reach much higher into the stratosphers of the ultra rich (55% for those making $1 million or more annually) ; elimination of the capital gains preference (so that all income is taxed under the same rate structure); and an estate tax with bite (meaning a graduated rate that protects a reasonable nest egg for the next generation while serving as one method of limiting the concentration of wealth)-- is to ensure the freedom of each and every one of us, from rich to poor, from newly arrived immigrant to elderly Native American.

Don't Like "Money Printing"? Then Stop Borrowing. Whip Inflation Now!

2011-04-12T10:00:00.000-07:00

by Steve Roth

Don't Like "Money Printing"? Then Stop Borrowing. Whip Inflation Now!
Cross-posted at Asymptosis.

There's a widespread conception that "money printing" by the government causes inflation, and that "money printing" = government deficit spending.

But people don't realize that:

1. Most money printing is done by banks, not government.

2. Government deficit spending is only one of four flows that affect inflation.

Here's how borrowing prints money:

You borrow $10 from the bank. You give them nothing more than an IOU, and they credit your account for $10, created out of thin air. Voila! Money printing.

That's the essence, but in practice it's a bit more complicated. The bank is required (by their charter) to hold reserves (money) on deposit in their account at the Fed to "cover" that loan. But -- ah, the beauty of fractional-reserve banking -- they only need one extra dollar in their reserve account to cover the ten-dollar loan.

Where do they get the dollar? They sell $1 in treasury bonds (also, originally, created out of thin air) to the Fed. The Fed credits the bank's reserve account with $1, and adds a $1 Treasury IOU to the Fed's assets. (This is also more complicated in practice, but that's the essence.)

Meanwhile you've got $10 to spend.

So yeah -- there's government debt involved, but of the ten dollars that were printed in this transaction, the Treasury/Fed printed one, and your private bank printed nine.

(For more on this, which I'll call the Demand-Side Theory of Money Creation, see my key inspirations for this post here and here.)

So if you don't like money-printing, (sell your financial assets, and) pay off your loans. It's the best way to destroy money.

Whip Inflation Now!

I hope my gentle readers will understand that this last is somewhat facetious. The relationship between inflation and the stock of money is tenuous at best. What drives inflation (pace some of my assertions here) is flows, not stocks. In particular, flows relative to production capacity.

This is actually remarkably simple and intuitive, even "obvious," based on straightforward supply and demand.

If the national demand for goods is less than the real economy's capacity to supply goods (think: 1930s), the value of the goods (in dollars) goes down, and the value of dollars goes up -- deflation. If demand exceeds supply capacity (or gets close), it's the reverse: dollars get less valuable (buy less goods) -- inflation.

Now: where does that demand-flow come from? Four places*:

1. Income: personal income (not including capital gains) and real (non-financial) corporate profits. (Some of the corporate profits flow to personal income via dividends and interest payments -- perhaps indirectly, because they're paid to other corporations which book them as financial profits; they can then, perhaps after several such steps, flow to individuals.)

2. Increases (decreases) in prices of financial assets, a.k.a. financial capital gains (losses). Think: the "wealth effect."

3. Credit issuance -- new money available for spending (debt payoffs reduce demand).

4. Government deficit spending. (When the government runs a surplus, net demand is reduced.)

So yes: when you pay off debt you're helping to control inflation -- but not really because you're reducing the stock of money (though you are doing that); rather, because you're reducing the flow (you're saving rather than spending), hence reducing the demand for real-economy goods and services.

Now of course you gotta question whether cutting inflation is what we want right now. I'm here to say that we'd all be a lot better off -- even rich people, in the long run -- if inflation were running at three or four percent.

More on that anon, and on those four flows and their relationship to inflation (etc.).

* This has a somewhat complicated relationship to Fed asset purchases. Especially when the Fed buys a lot of extra assets -- paying banks by crediting their reserve accounts, resulting in excess bank reserve balances and nominally increased money supply (think: TARP, QE I and II), it at least momentarily drives up the prices of those assets by increasing demand (see #2, above). Those prices -- and prices of financial securities in general -- will presumably decline whenever it unloads those assets, both increasing supply and sucking money out of the financial system. That effect aside, these purchases only increase demand if the banks A. lend more based on their increased reserves (#3, above), B. use the money to buy other financial assets, driving up the prices of those assets (#2; again, zero-sum long-term), or C. spend money the wouldn't otherwise have spent on real-economy goods and services (especially if the wouldn't ever have spent it, even long-term). In fact, most of those excess reserves (about $1 trillion -- circa 20x required reserves, up from almost zero pre-crisis) are just sitting in the banks' accounts at the Fed, earning .25% interest. Big asset purchases by the Fed can also, of course, have an even-more-complicated short-term impact on #3, credit issuance, via interest-rate shifts. Based on this data suggesting low demand for credit and relative indifference of borrowers to small interest-rate moves, at least in the current climate that impact seems to by relatively small.

Greece: This Decade's Argentina?

2011-04-04T17:19:00.000-07:00

There's been a bit of discussion floating around about whether the US's deficit and debt situation makes it appropriate to draw comparisons with Greece. Of course, such a comparison is ridiculous for a number of reasons, not least because the US has its own currency. But Greece has been on my mind lately for unrelated reasons, including the following news:

Euro economists expect Greek default, BBC survey finds
Greece is likely to default on its sovereign debt, according to the majority of respondents to a BBC World Service survey of European economists. Two-thirds of the 52 respondents forecast a default, but most said the euro would survive in its current form.

...The forecasters the BBC surveyed are experts on the euro area - they are surveyed every three months by the European Central Bank (ECB) - and as well placed as anyone to peer into a rather murky crystal ball and say how they think the crisis might play out. The survey had a total of 38 replies and two messages came across very strongly.

Not only do I agree that default by Greece on its sovereign debt is quite possible... but I think it increasingly likely that policy-makers in Greece may decide that it is the least bad option at this point, particularly in the face of an increasingly hard-line attitude from Germany regarding bailouts (which will only be reinforced by recent election results).

The problem is easy to lay out: Greece has more debt than it can realistically make payments on, and being a euro country also has a currency over which it has no control. If it had its own currency, it would be in a classic debt crisis similar to several Latin American countries in the 1980s, or possibly Mexico in 1994.

However, it effectively has a fixed exchange rate with the rest of the euro zone, and has invested enormous political and economic capital in maintaining its committment to the euro. In that sense, the best analogy might be with Argentina in 2001, which was struggling to maintain a rock-solid fixed exchange rate with the US dollar through a currency board arrangement.

Argentina in the late 1990s had a slowing economy, uncompetitive industries, large current account deficits, and a vast amount of external debt denominated in a currency that was not its own. Sound familiar? In an effort to meet its debt payments while simultaneously keeping its exchange rate pegged to the dollar, the Argentine government squeezed and squeezed the economy. Finally, however, the resulting deflation and recession grew so severe that the government collapsed, and in early 2002 a new government dropped the peg to the dollar (after fiddling with a hybrid system with multiple currencies existing simultaneously) and eventually defaulted on its debt.

And look what happened.

From 1999-2002 Argentina suffered through years of a gradually contracting economy as it tried to maintain its peg with the dollar and service its external debts. When it finally dropped the peg in January of 2002 and then defaulted on its external debts, the economy (along with the value of the peso) crashed quite spectacularly.

But after a year or two, things didn't look so bad in Argentina. And through most of the 2000s, the economy did quite well, despite the loss of the ability to borrow internationally.

I'm not necessarily advocating that Greece follow the same path. However, I do think that the comparison with Argentina in 2001 is a very good one, and because of that, that there is indeed a very good chance that policy-makers in Greece in 2011 will reach the same conclusion that policy-makers in Argentina did in 2002.

Greece is not Argentina

2011-04-04T17:18:00.000-07:00

I politely disagree with the conclusions of the article written by my Angry Bear colleague, Kash, where he envisages Greece defaulting in 2011 similarly to Argentina in 2001.

I do agree, that the macroeconomic initial conditions in Greece scream default (actually, if you focus just on the measurable factors, like the current account, debt levels, or fiscal imbalances, Greece is much worse than Argentina in 2001 - see Table 4 of this IMF paper to see Argentina's initial conditions and compare them to Greece in 2009 using the IMF World Economic Outlook Database).

Where I disagree, arguing that Greece is not like Argentina, is that the debt crisis in Argentina didn't bring down the banking system of Latin America overall. In contrast, the default of Greece has the potential to do just that in Europe.

Update: see David Beckworth's Macro Market Musings includes Rebecca's thoughts on ECB

In Argentina, the Latin American banking system (and sovereign bonds, for that matter) was quite resilient in the face of the sovereign default in Argentina. Uruguay was the exception, whose two largest private banks, Banco Galicia Uruguay(BGU) and Banco Comercial (BC), which account for 20% of the country's total, saw near-term liquidity pressure and an ensuing banking crisis in 2002 (see this IMF paper for a history of banking crises). All else equal, the IMF reports only minor impact to the region as a whole:

With the possible exception of Uruguay, economic and financial spillovers from the Argentine crisis appear to have been generally limited to date—as indicated, for example, by the muted reactions of bond spreads in most other regional economies and their declining correlation with those of Argentina, together with other favorable trends in financial market access and the general stability of exchange rates over recent months.

In contrast, the European banking system is highly interconnected. For example, according to the German Bundesbank, Germany's bank exposure to Spain was roughly 136 bn euro in December 2010, where most of it is held in the form of Spanish bank paper, 56.4 bn euro, and Spanish enterprises, 58.3 bn euro; the rest is in sovereign debt. Furthermore, German banks are sitting atop 25 bn euro in (worthless) Greek paper, primarily in the form of sovereign debt. Euro area countries are exposed to other banks AND the sovereign; but more importantly, the ones that save (run current account surpluses) are the ones holding the worthless (in some cases) bank and government debt. (read more after the jump)

Bank risk is a big risk in Europe. Based on the consolidated banking data at the Bank for International Settlements (BIS), German banks hold 22% of the Greek external debt load i.e., bank debt + sovereign debt + corporate debt), while French banks hold 32% (see Tables below). Furthermore, German banks accumulated 20% of all Irish external debt, 14% of Italy's, and 21% of Spain's.

So the question is, not what will happen if Greece defaults, per se; but will a Greek default set off a chain reaction liquidity crunch that challenges asset valuations in the other Euro area banking systems (for bank paper and sovereign paper)? I suspect that it will, since the European banks are still building their capital buffers.

My point is, the Germans are partial to NOT letting Greece default. All fiscal austerity aside, the Germans have demonstrated that they'd rather write a check than take the writedowns, at this time. Therefore, from this perspective, I find it very unlikely that Greece defaults this year (or next, really).

Now, you're probably thinking: well, it's in Greece's best interest to default. Willem Buiter calls Greece leaving the Euro area 'irrational'. An irrational chain of events must be put in place in order to presage such a disorderly default (see 8. 'Break-Up Scenarios for the euro area' in the publication). We're not there yet, since Greece is still in asset-selling austerity mode.

It's political repression.

BIS data representation I: in Shares of external debt outstanding (click to enlarge)

BIS data representation II: in levels of external debt outstanding (click to enlarge)

Rebecca Wilder

color slide show

2011-03-14T17:18:00.000-07:00

Trade policy discussion Feb.22

2010-02-22T09:21:00.001-08:00

blockquotes

2010-01-17T01:48:00.000-08:00

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What else will it look like.

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Spare Us From the Invisible Hand

2009-10-19T02:27:00.000-07:00

by Gavin Kennedy

Spare Us From the Invisible Hand

Patrick Kilbride writes in Chamber Post HERE:

“Free People, Free Minds, Free Markets”

‘In the 18th-century, Adam Smith left us with the indelible image of markets producing desirable social outcomes through the work of an "invisible hand." ’

Comment
In an otherwise neat argument for both liberty and free markets, Patrick Kilbride spoils his case with modern nonsense about Adam Smith and his use of the metaphor of “an invisible hand”.

Smith did not use the metaphor when explaining either how markets work generally (Books I and II, Wealth Of Nations) or how some, but not all, merchant traders preferred to invest locally following their concerns about the higher risks of investing abroad or in shipping (Book IV.ii, Wealth Of Nations).

In fact, a close reading of the only place in Wealth Of Nations where he used the metaphor of an invisible hand, shows that he first explains in detail the circumstances leading some, but not all, merchant traders to behave as they did (paragraphs 1 to 8, chapter 2, Book IV), and only then deploys the metaphor for the consequences of their specific behaviour (“intending their own security”), conforming to the arithmetic rule that the whole (the national annual output of wealth, including local employment) is the sum of its parts – the more merchant traders who are risk averse, despite the high profits from foreign and colonial trade, the greater the total annual wealth, including domestic employment.

Modern economists have invented a whole new meaning to Smith’s singular use of the metaphor, giving it the characteristics of a “law” of markets, though it was never stated as such by Adam Smith.

The modern invented meaning is commonly taught in first year economics courses and textbooks, and such is the effect of it on modern economists, it is extremely difficult to dislodge it – they seldom actually read Wealth Of Nations or even the relevant paragraphs (1 thru 8) and, by relying on a truncated extract from paragraph 9 only, they remain solidly convinced that Adam Smith explicitly stated what their tutors told them he wrote.

This gives succour to hostile critics of markets who throw the “invisible hand” back at them (“invisible fist” or, as seen recently, “invisible middle finger”, and such like). But there is no actual “invisible hand”, it does not exist and never did. The metaphor is just that, a metaphor, and one that was popular in literature, sermons, and poems in the 17th and 18th centuries – I have a list of 59 examples of its uses, besides Smith’s.

Mathematicians called it into being when “proving” that general equilibrium in an imaginary market, loaded with assumptions that removed all semblances of real world economies, was a theoretical possibility (Debreu, Arrow). Others (Samuelson, Freidman) and among them propagandists against Soviet communist planning, used the metaphor to good effect – Stalin needed the gulags to enforce planning, but free markets had an “invisible hand” that did its work without menace.

Editors of Time, Newsweek, Wall Street Journal, Financial Times and assorted media journalists loved the “invisible hand”, Nobel Prize winners sang it praises, and the epigones believed in its miraculous powers with the passionate certainties of Jihadists.

Worse, the invisible hand became an alibi of last resort, flaunted all round as if it existed. When it “failed”, the invisible hand was dumped among wails and the gnashing of teeth in wholesale “confessionals” (Alan Greenspan).

Markets suddenly became naked – they always were naked, but the veil of the invisible hand obscured their nakedness. It never was the answer to everything that could go awry in the normal condition of disequilibrium in all economies, much of it excited to crises by public policy interventions by legislators and those who influenced them.

Smith was right about them and the damage they could inflict – fortunately “there is a lot of ruin” in an economy, as he might have put it in another context...

The New Black Gold--will tax boondoggles never cease?

2009-10-17T03:17:00.000-07:00

The tax code seems to foster one boondoggle after another. The ones getting my attention this week are the alternative fuel tax credits enacted in the 2005 highway bill. This was intended as a credit to encourage the development of alternative fuels for vehicles to cut our reliance on global warming-causing fossil fuels. See Natural Gas Vehicles for America, "Regulatory Summary: Alternative Fuel Credit-IRS Notice 2006-92" (Sept. 30, 2006) (discussing the alternative fuel credit of 50 cents a gallon under section 11113 of the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users). But it was modified in 2007 , and as a result the paper mills discovered a credit for a process the industry had been using since the 1930s --it just had to add (in some cases) enough diesel fuel to qualify.

The paper industry essentially cooks wood pulp to turn it into paper, and a byproduct of that process is a dark sludge called "black liquor". The companies use the black liquor as a fuel to generate steam for electricity. And by adding just a small amount of real diesel fuel to the mix, they qualify for the alternative fuel mixture tax credit. And, not surprisingly, they love the "extra cash flow and income." See Sharon, Paper Industry: Don't Kill Fuel Credit, NPR (June 6, 2009) (reporting a $10 million savings from the credit in the past year for one company).

Sen. Bingaman suggested that the paper industries discovery of this black gold hasn't got much to do with the development of alternative fuels.

The alternative fuel mixture credit was originally intended to encourage
the development and use of alternative fuels as a way to decrease global warming
pollution. But by adding fossil fuel to their black liquor mix, Bingaman
says, paper companies are rewarded 50 cents a gallon for doing the
opposite. Id.

Bingaman wasn't the only critic. Canada joined with other countries to demand that the US end the paper industry subsidy, threatening a trade action because of the way the credit had distorted global pulp markets. Schott's Vocab: Black Liquor, NY Times, June 11, 2009.

Some companies had in fact used diesel all along in their effort to burn their own byproduct to produce energy, while others had changed the fuel blend to benefit from the tax credit. Companies claimed that they are doing exactly what the law intended. The Natural Resources Defense Council disagreed, calling it a "travesty" because it has meant reduced reliance on biomass fuels and increased consumption of fossil fuels "in order to rip off the American taxpayer." Lawmakers May Limt Paper Mills' Windfall, NY Times (Apr. 17, 2009).

This particular credit is supposed to sunset at the end of 2009, but companies wanted it continued. Let's face it, few corporations that have found a piece of corporate welfare in the Code are interested at all in seeing that "entitlement" turned off. The amounts are significant--for International Paper, $71.6 million for just one month from mid-November to mid-December last year. See Papermakers Dig Deep in Highway Bill to Hit Gold, Washington Post, Mar. 28, 2009. Not surprisingly, representatives of pulp mill states seem to think the credit is great--Republican Olympia Snowe called it a "critical lifeline to thousands of paper mills". Snowe, What the Black Liquor Tax Credit Means for Maine, Apr. 25, 2009.

The Obama administration wanted to stop the billions flowing under this provision to the paper industry, we were told in May. See Obama Seeks to Halt Alternative Fuel Tax Credit for Paper Industry, Washington Post, May 9, 2006. At $6 billion a year, eliminating the credit--even retroactively for 2009 (it expires in December, unless extended)-- for the paper industry could generate some revenue and at least some in Congress were considering just that. See Black Liquor Tax Credits: A Closing Loophole for the Pulp & Paper Industries, Accuval, Sept. 2009. Of course, the companies lobbied for maintaining it through 2009 and in fact for extending it for at least three years. See Appleton Papers et al, Comments to the Senate Finance Committee on the Alternative Fuel Mixture Tax Credit (July 9, 2009).

Now, it turns out that there is another biofuel tax credit that already extends through 2013, passed as part of the 2008 Farm Bill. See Voegele, IRS: Cellulosic biofuels are eligible for tax credit, BioMass Magazine (Dec. 29, 2008) (describing Notice 2008-110, which describes the tax credits under sections 40A, 6426, and 6427(e) for biodiesel and cellulosic biofuels, enacted in the 2008 Farm Bill for the years 2010-2013). See Committee on Finance, Finance Committee Leaders Detail Elements of Farm Bill Tax Package, page 3, Apr. 14, 2008.

Black Liquor is certainly cellulosic, so the mills may have something even better to replace the expiring black liquor alternative fuels tax credit--instead of 50 cents a gallon, they may qualify for the cellulosic biofuel credit amounting to $1.01 a gallon! Let's see. That'd apparently mean a subsidy double the current one invested in "incentivizing" paper mills into doing what they've already been doing since 1930--converting wood waste into a source of energy to power the mills. See Donville, U.S. Paper Makers' Black-Liquor Tax Break May Reach $25 Billion, Bloomburg.com (Oct. 15, 2009) (quoting Mark Connelly that we should "Think of this as a potential black-liquor II" and Marty Sullivan as forecasting "$25 billion in tax reductions for pulp producers claiming the cellulosic biofuel tax credit over the next three years").

This credit for the paper industry is of slightly smaller magnitude than the bailout we gave the auto industry. In both cases, the argument is that these industries employ many who would otherwise lose their jobs, and who but the government will be willing to help them through these extraordinarily tough times. Yet both industries produce a product that we ought to learn to do without--the gas guzzlers that Detroit was producing pollute the air, require the destruction of vast land for roads, and use enormous amounts of energy in the process, while pulp mills chew up world forests at a frightening rate producing tons of waste that must be absorbed.

I wish it were as easy to get Congress to increase the taxes owed by the superrich as it is to get them to add boondoggles for one industry or another in the form of a tax break in the tax code. I want to see alternative energy succeed, but I'm not sure these tax credits are targeted sufficiently at the new technologies that we should be encouraging.

Open thread Oct. 17, 2009 (with GW)

2009-10-17T03:01:00.000-07:00

Wired for sterotypes and stereotypical respones?

2009-10-17T02:46:00.000-07:00

rdan

Stereotypes and the brain suggests that older folk (over 60-88) are more susceptible to stereotypical thinking than younger people (age 18-25).

A decade ago, a research team led by William von Hippel of the University of Queensland challenged that assumption. The psychologists proposed that older people may exhibit greater prejudice because they have difficulty inhibiting (bolding mine) the stereotypes that regularly get activated in all of our brains. They suggested an aging brain is not as effective in suppressing unwanted information — including stereotypes.

In two recently published papers, von Hippel and Gabriel Radvansky of the University of Notre Dame provide compelling support for this concept. In the Journal of Experimental Social Psychology, they describe a series of experiments designed to assess whether older adults were relatively more likely to draw and remember stereotypic inferences.

Forty-eight older adults (age 60 to 88) and 71 younger adults (age 18 to 25), read four stories, each of which "allowed for stereotypic inferences." Two of the tales featured African Americans, one dealt with people from Appalachia, and one involved Jews. After finishing the stories, the participants were shown a series of statements relevant to the tale, and asked to rate them as true or false. Some of these statements were strictly factual, while others contained inferences of stereotypes.

The results revealed "significantly greater memory strength among older adults for stereotype-consistent situation models," the researchers write. "This finding supports our suggestion that older adults are more likely to make stereotypic inferences during comprehension, and that this stereotyping carries over into their later memory for that information."

This process "appears to be a more general phenomenon of aging," they note, adding that some older adults "may be relying on stereotypes despite their best intentions to the contrary."

The second paper, published earlier this year in the journal Aging, Neuropsychology and Cognition, contains a way around this problem. It describes a study in which older and younger adults read a story in which a central character was employed in a sex-stereotyped profession. In half the stories, the character's gender was consistent with the stereotype (a male plumber), while in the other half it was inconsistent (a female plumber).

"Results revealed that with explicit labeling, older adults were able to discount their stereotypes and avoid processing difficulties when subsequent stereotype-inconsistent information was encountered," the researchers write. "These data suggest that when counter-stereotypical information is explicitly provided at encoding (that is, the first stage of the memory process, in which stimuli are initially registered), older adults are no more likely than younger adults to rely on stereotypes, and are similarly capable of altering their interpretation of a situation when information suggests that information is incorrect."

In real life, of course, no one is pointing out biased statements as they emerge from the mouths or friends, family members or talk-show hosts. So for older adults, the best advice might be to avoid acquaintances who speak in stereotypes. This research suggests prejudice can be contagious, and we become more susceptible as our brains age.

I have not read the protocols nor the material, but several thoughts occur:

1.) Since the age gap is so wide, can one measure the common thread of stereotypical thinking from only one set of examples? Can you fashion a story that is common to both generations and isolate from socialization?

2.) Part of the theory involves brain based cognition, as the brain enters a more fluid phase of brain cell connections during the teens to early twenties. However, connections in older adults might be fewer overall but can be more complex in connections. What that means is not clear.

Sort of like blonde jokes, you know. Substitute brunette and the joke isn't funny anymore.

WaPo Headline and Abstract III

2009-10-17T00:48:00.000-07:00

Robert Waldmann

I think that something has changed at www.washingtonpost.com, because I am infuriated by many headlines and abstracts of articles. I don't know if the same headlines appear in the dead trees version.

Today we get

Record-High U.S. Deficit May Dash Obama Goals
Budget gap of $1.4T, while an improvement over worst projections, means less to spend on White House's ambitious jobs and stimulus packages.

So the news is that the deficit is smaller than predicted, but the headline stresses the fact that it is huge, just as we knew it would be. The phrase "means less to spend" asserts that the size of a stimulus is limited by available funds -- that is that they can't stimulate in a way which adds to the deficit -- not that one sholdn't but that they are limited by a current year budget constraint (an intertemporal budget constraint plus a liquidity constraint). I have difficulty imagining what sort of entity could make such an assertion in the same sentence which notes a $ 1.4T deficit.

Can an actual human with a human brain think that spending by the federal government with a $1.4T deficit is limited by how much it has to spend? I ask for information -- my current guess is that the headline and abstracts are being written by a script which takes phrases at random from the latest RNC press release.

If a person is involved, he or she might say that he or she is predicting the political debate -- Republicans and conservadems will say that the huge deficit means the federal goverment must tighten its belt (I assume they refer to the beltway as otherwise the phrase makes no sense). They can block bills in the Senate so they will win the debate over further stimulus in the sense of having enough power to block further stimulus (win the debate in the might makes right sense that is).

Therefore The Post employee merely notes that idiotic arguments will determine policy, because there are more than 40 idiots in the Senate. He or she doesn't make the claims which appear on www.washingtonpost.com, that wouldn't be proper ~~stenography~~ journalism. Of course the Post is obliged to make in its own voice any idiotic argument against action which is supported by 41 senators, because it is a newspaper dammit and must not contribute to the debate, but only report who has the power to win it (which is almost always the advocate of no further action given the way the Senate works). The fact that the current forecast of the deficit is smaller than previous forecasts can't be denied, but it is unimportant, because it is inconvenient to obstructionists who have the power to prevent further stimulus and therefore will win the debate (in the sense of successfully filibustering and making sure it would last forever before a vote is called).

Open thread Oct. 16, 2009 (no GW)

2009-10-16T14:13:00.000-07:00

Elinor Ostrom - An End to Homo Economicus?

2009-10-16T02:00:00.000-07:00

by Gavin Kennedy (cross posted from Adam Smith's Lost Legacy)

Elinor Ostrom - An End to Homo Economicus?

Mario Rizzo writes (13 Oct) in Wall Street Pit HERE and Here:

“Elinor Ostrom and the Relevance of Economics”

“In fact, I would venture the guess than most economists had not heard of her before the prize was announced yesterday morning.

Two reasons for this are that her degree is in political science and she has written for publications outside of the mainstream economics journals. Additionally, her work, by and large, lacks the high degree of mathematical formalism now so characteristic of economics.

Yet the Nobel Prize Committee has done a great service to economics and the greater social-scientific community. When a well-known economist receives the prize little is gained apart from the recognition of a job well done and perhaps some wider public recognition. I do not think that great contributions are made in any discipline because of the incentive effects of an improbable prize. However, in this case the Nobel Committee has brought extraordinary work to the attention of an economics discipline that has become excessively specialized and, perhaps increasingly irrelevant to the real world, as Paul Krugman and others have recently suggested.

Professor Ostrom’s work is highly relevant to important issues in economic development, common-pool resources, the development of social norms, and the solution of various collective action problems. Her work is also methodologically diverse. She uses experimental methods, field research, and evolutionary game theory. She is not afraid to draw on various disciplines when appropriate: economics, political science, evolutionary psychology, cultural anthropology and so forth.

Update: rdan here...Barkley Rosser comments on Elinor as well.

“She is a very worthy intellectual descendant of Adam Smith who realized that the study of trade based on self-interest needed to be supplemented by a broader view of humankind – individuals capable of the so-called “moral sentiments” like honesty, benevolence, and loyalty, as well as the standard vices.”

“The central problem on which her employment of the notion of “thick rationality” can shed light is what she calls “social dilemmas.” These are circumstances in which interacting individuals can easily succumb to maximizing their short-term interests to the detriment of their long term interests. To return to our irrigation example, suppose farmers share the use of a creek for irrigation. They face a collective problem of organizing to clear out the fallen trees and brush from the previous winter. Each farmer would like to have the others do it. There are incentives to free-ride on the “public spiritedness” of others – however, everyone may think this way and nothing will get done. Ostrom finds that cooperation will often take place while the “thin” theory of rationality predicts that it will not. She finds that factors such as face-to-face contact (likely when there are small numbers), the equality of each farmer’s stake in the benefits of irrigation, and the ease of monitoring the farmer’s contribution to brush removal all make the likelihood of cooperation greater.”

Comment
If, like me, you are unfamiliar with the new Nobel Prize winner, Elinor Ostom’s work, you should start by reading this short piece by Mario Rizzo. It is a continuation of Adam Smith’s approach to moral philosophy and political economy.

It also rejects the sanitized neo-classical formalism, locked into abstract maths and non-human theories of rationality, but which claims “scientific” status despite the evidence that little of it applies to the real world and real humans – and when it is applied and policy conclusions are drawn from it and tried, they fail miserably, as the billions spent on development have shown from their unspecified, though visible and obvious, unintended outcomes.

From what I have read so far, Adam Smith’s legacy is safer in Elinor’s hands than almost the entire discipline of modern neo-classical economists put together.

In Which I Hope I'm Gettying Pranked

2009-10-15T19:32:00.000-07:00

This cannot be true, can it?

Louisiana Justice of the Peace Denies Marriage License to Interracial Couple:

According to [Keith Bardwell, a justice of the peace in Tangipahoa Parish], he won't support interracial marriages because he doesn't feel that black or white society will accept the children of the couple once they are born.

I can't find him in Martindale-Hubbell, but other articles note him saying:

"I've been a justice of the peace for 34 years and I don't think I've mistreated anybody. I've made some mistakes, but you have too. I didn't tell this couple they couldn't get married. I just told them I wouldn't do it."

*Sigh*

Scariest Irvine Foreclosure

2009-10-15T17:29:00.000-07:00

Dr. Black had a link to foreclosures in Irvine, California. This one especially caught my eye:

5031 Alcorn Lane, Turtle Rock
Amount owed: $298,876.14
Last sale: July 2001, $485,000
Auction date & time: Nov. 5 at 10 a.m.
Location: In front of the flagpoles at Placentia Civic Center, 401-411 E. Chapman Ave.
Trustee sale #: JPM-580
Information: 714-573-1965 [emphasis mine]

I assume the JPM means JPMorganChase, though that's not the important thing.

If you look at the other houses, the "last sale" and "amount owed" values are fairly close, or the Amount Owed is higher. Which is what you would expect.

But not only is this one not higher, it's not even close. It's almost a 40% decline from the last sale date—and more than a $185,000 difference. And 2001 wasn't exactly top of the bubble anywhere, especially not in Irvine.

Why does a house get foreclosed? Because it can't be sold to cover costs adequately. But in this case, we're not even talking about needing a short sale.

No one was willing and able to bid enough on the property to keep it from being foreclosed.

Nearly 40% below 2001 levels would be severe. The Shiller Real Home Price Index indicates that prices are just about even with (maybe 2% below) their 2001 level.

Either this is a real outlier, or the housing crisis is much worse than even the most pessimistic predictions.

Rasmussen

2009-10-15T07:42:00.000-07:00

Robert Waldmann

The Rasmussen polling agency has two reputations. They have a good record predicting the vote in elections (which means especially primary elections give schduling and attention and stuff). On general public opinion, they ask questions which sure sound like Republican push polls. The theories are that they want to become Republican's favorite pollster and/or that Scott Rasmussen allows his Republican preferences to guide his polling decisions.

I have the impression that Rasmussen generic house ballot polling should be classified with general opinion polling and not other forecasts of voting.

Look at this table from pollster.com

All but four of 52 polls by pollsters other than Rasmussen show the Democrats ahead -- more people declare their intention to vote for a Democrat for the House of Representatives in 2010 as declare for the Republicans. All but one show the Democrats ahead and one of the three is a partisan onmessage/RNC poll which shows a 36% to 36% tie.

In contrast, the last 16 Rasmussen polls in a row show the Republicans ahead of the Democrats. Overall other than Rasmussen has 48 D, 2 R 2 tied and Rasmussen has 21 D 20 R and 4 tied. This difference is uhm significant.

Partly Rasmussen polls likely voters. 4 of 6 non Rasmussen polls are Dem partisan polls (all show Dems ahead) the remaining two show ties.

In the 11 non Rasmussen polls which include data from September and/or October the Democrats lead by an average of 7.09 % in the 6 Rasmussen polls the republicas lead by an average of 3.33 %

The perception that the gap is narrow is entirely due to Rasmussen.

Notably, the average congressional voting intention poll is hard to reconcile with exceedingly low approval ratings for Republicans and Republicans in Congress. It has already been widely noted that the average of generic house ballot polls (which is about half Rasmussen) is anomalous given answers on other questions.

I note that pollsters are evaluated using the last few polls before an election. The hypothesis that Rasmussen plays it straight when they know they will face a moment of truth and slants Republican when they know they won't fits not just the issues polling but also the generic house ballot more than a year before an election polling.

Talking Point vs Reality: Health Care Reform's Effect on Medicare

2009-10-15T07:01:00.000-07:00

by Bruce Webb

The latest Republican talking point, promoted among others by Chuck Grassley this morning, is that proposed cuts to Medicare make its financial situation more precarious. Why cut $500 billion if Medicare is already in trouble? This is totally backwards and shows a total unawareness of how Medicare is financed. So lets review:

Medicare has four 'Parts' A (Hospital), B (Physicians), C (Medicare Advantage) and D (Drugs).

Part A is financed primarily by a tax on payroll supplemented by co-pays for extended stays. Tax receipts not needed for immediate payout are deposited in the HI (Hospital Insurance) Trust Fund which like its counterparts in Social Security functions as a reserve fund, serving to buffer out fluctuations in tax income.

Parts B & D are financed by a combination of premiums and direct transfers from the General Fund, while Part C being a combination of A, B, and D draws from all three sources and is run by insurance companies.

The Health Care bills under consideration leave current revenues into Medicare alone and so CAN'T worsen the overall financial health of the system. Instead they propose to change the payment mix going out and slash the extra premium going to Part C and so make the overall financial position BETTER. These changes actually move the date the HI Trust Fund is projected to go to depletion OUT IN TIME.

Now it is fair to argue that cuts in Medicare potentially deprive people on Medicare benefits they have come accustomed to, but the argument that they financially weaken Medicare is to get it 180 degrees reversed. Republicans have been bleating about an 'entitlements crisis' whose costs are out of control. Well the answer to that is to cut costs. The only difference is that Democrats propose to use the savings to extend coverage to the uninsured while Republicans were hoping to use them to preserve tax cuts.

So don't buy the "We are trying to save Medicare" argument from the Republicans, they don't like it, never have, and don't care in principle about cutting money going to gramma. Instead all of this, all of it is about wanting Obama and the Democrats to fail so that Republicans can make gains in the 2010 mid-terms. Pay no attention to the crocodile tears.

Just Kill Me

2009-10-15T05:14:00.000-07:00

Robert Waldmann

Don't kill the guy who writes headlines for www.washingtonpost.com. Nonviolence. First amendment. Free press. Don't do it.

I have already complained about another headline today, but I must admit that "Stagnant Prices Prevent Social Security Increase" totally leaves "Cap-and-Trade Would Slow Economy, CBO Chief Says" in the dust.

OK so now the inflation rate formerly known as "price stability" is called "stagnant prices." Some traditions were not abandoned -- a nominal increase which is not real is called an increase, because reality is for nerds.

It is remotely conceivable that the headline writer might be sophisticated enough to know that a tiny bit inflation is good for the economy and way better than deflation, but my working hypothesis is that in order to launch the Web 2.0 version of the WaPo and relate to the hep kids, The Washington Post hired the guy who wrote headlines for "The Onion."

Is anyone willing to look me in the eye and claim that there are two different human beings weird enough to think of "Stagnant Prices Prevent Social Security Increase" and "Poll: Happy, Healthy Obamas Out Of Touch With Miserable Americans."

Well I'm sorry ghost of Katherine Graham turning over in her grave, but wacky headlines are just not enough to make The Washington Post "America's Finest News Source."

Update: Rdan here...Yves adds her thinking to the issue

Globalized medicare vouchers

2009-10-15T02:24:00.000-07:00

rdan

Dean Baker suggests an intriguing innovation to competition in healthcare:

While health care may at first blush not seem suitable for international trade, since the delivery is place specific, on closer inspection there are ways that the United States could benefit from the more efficient health care systems of other countries. The most obvious mechanism is by allowing Medicare recipients to buy into the health care systems of other countries.

The logic of a globalized Medicare program is very simple. Since most Medicare beneficiaries are retired, they don't need to be close to their workplace. Many beneficiaries have family or emotional ties to other countries and may welcome the opportunity to spend their retirement years in Germany, France, Canada, or some other country. If the government gave beneficiaries a Medicare voucher that would allow them to buy into the health care systems of these other countries, there would be enormous savings that could be split by the government and the beneficiary.

Of course, it would be necessary for the government to negotiate the mechanics of this deal country by country. This would be comparable to negotiating a trade deal like NAFTA, although it would be far simpler and the potential economic gains would be much larger. In fact, we could even pay the receiving country a premium to ensure that they benefit as well from globalized Medicare.

The potential gains from trade in health care are enormous. We calculated that the savings to the government would be $1,700 per beneficiary per year in 2020. This would rise to $7,200 in 2045, and $28,000 per beneficiary per year in 2085. (All numbers are in 2008 dollars.)

Identify the Invisible Hand!

2009-10-15T02:02:00.000-07:00

by Gavin Kennedy
(cross posted from Adam Smith's Lost Legacy)

Identify the Invisible Hand!

Alex Tabarrok writes on the Nobel Prize for Oliver Williamson in an article on the Marginal Revolution Blog “Oliver Williamson and the pin factory”, which is fine but it contains the following paragraph:

“Transaction cost economics is all about applying these ideas in different settings to figure out the best governance structures (marriage, vertical integration etc.) in different circumstances. How does one deal with expensive investments (such as highly individual dies or plant construction) that are specific to a given trade and put the investor at risk yet which increase productivity? Williamson analyzes how firms come to rely on long term contracts or vertical integration or other seemingly non-competitive solutions to enhance market productivity. Early generations of antitrust enforcers often saw these as monopolistic dealings, but scholars such as Williamson helped us understand how these are essential to the workings of the invisible hand.”

Comment
Be clear, I applaud the award to Oliver Williamson, whose books I read as an undergraduate (I bought these outside of the recommended reading list and tried to introduce their ideas into my essays), and, of course, applaud the shared award with Elinor Ostrom.

So deep is the modern association of the workings of markets with the metaphor of the “invisible hand”, that it slips in even in the strangest of circumstances.

How is vertical integration “essential to the workings of the invisible hand”? What “workings”? Where can they be seen? Who has seen them to date? Where did he or she see them? Where did they describe them in a publication? Where in the maths of markets is the term for the “invisible hand”?

I could go on, but won’t.

What Caused the Financial Crisis ?

2009-10-15T00:46:00.000-07:00

Robert Waldmann

has definitely not been spending enough time in bars. Nation food correspondent Calvin Trillin met a guy in a bar who explained why the financial system collapsed.
I nominate some guy in a bar for the Nobel memorial prize in economics.

The explanation ? “The financial system nearly collapsed,” he said, “because smart guys had started working on Wall Street.”

Proof beyond reasonable doubt here (via Ezra Klein who also sent me to this video which is why I am here and which shows that when they put their minds to it, smart guys can do other things than destroy financial systems).

Innumeracy

2009-10-14T21:50:00.000-07:00

Robert Waldmann

Doug Elmendorf says that the costs of cap and trade will be miniscule and does not try to estimate the benefits. Juliet Eilperin of the Washington Post demonstrates that she is the second most innumerate person on the planat, the most innumerate is they guy who wrote the headline "Cap-and-Trade Would Slow Economy, CBO Chief Says"

The headline supposed to be justified by

Elmendorf testified before the Senate Energy and Natural Resources Committee that the cap-and-trade provisions of the House bill -- in which emitters of greenhouse gases would be able to buy and sell pollution credits -- would cut the nation's gross domestic product by 0.25 to 0.75 percent in 2020 compared with "what it would otherwise have been," and by 1 to 3.5 percent in 2050.

Now the standard way of describing GDP growth is the annual rate. As the cost of health insurance subsidies and medicaid advantage is the 10 year cost not the yearly cost, so the effect of cap and trade on growth is the effect after 10 years or 40 years not the effect on the growth rate. Elperin doesn't say when the CBO assumes cap and trade will be introduced (the bill they scored did but I haven't read it relying as I do on newspapers to report the news). I guess it would start in 2010, so Elmendorf said the growth rate of GDP would be reduced by 0.025 % to 0.075 %percent for ten years and 0.025 % to 0.0875 % percent for 40 years.

These are tiny tiny numbers compared to the average growth rate and compared to the standard deviation of the annual growth rate and compared to anything.

In a standard Solow type growth model with perfect competition and no spillovers, you can't get something for nothing. The CBO calculates that we will get a cooler climate for as close to nothing as the result of any such calculation has ever been.

But numbers don't matter at the Washington Post -- they only care about the sign of the number which follows directly and immediately from standard (and false) assumptions.

Scheduled flight WP0085* lowered it's cruising speed from 600 to 599.975 mph and therefore stalled, crashed and burned.

*The flight number 85 is not to be interpreted as extremely rude and unfounded speculation about anyone's IQ.

Letters matter too. The calculation is of GDP. We might care more about GNP. Other things equal GNP -GDP will be reduced by the interest on the money we send overseas to buy petroleum. This is not a miniscule sum.

in 2005 US oil imports were around $ 200 billion. Ignore the fact that US petroleum production will decline and assume that the relative price of petroleum will be equal to that in 2005. That is, very roughly, 1.4% of GNP. Over 10 years the cumulated value of petroleum imports will amount to very very roughly 13% of GNP (here I assume we pay interest lower than the growth rate of GNP as foreign suckers buy T-bills). According to the CBO, cap and trade would cause higher GNP in 2020 if we pay 2% on the debt, that cuts 0.026 % of GDP from GNP-GDP.

With totally absurd assumptions about how little we will import and how cheap it will be and that foreign suckers will keep loaning to us at low rates, I get a cost of interest on petroleum imports of the same order as the estimated effect of cap and trade on GDP. With semi realistic assumptions about the volume of imports and the relative price of petroleum (note the dollar value of imports roughly doubled from 2000 to 2005) I can easily get that cap and trade will pay for itself if it significantly reduces importation of petroleum.

That is not counting the value of coal still in the ground let alone the value of reduced global warming which is, you know, the point of the whole exercize.

update: Coal still in the ground. GNP and GDP count the value added by mining as the value of the product, not the value added by digging it up. This is a measurement error. US coal production is about half a billion tons. The price differs *a lot* depending on quality and bounces around a lot, but is roughly around maybe $ 40/ ton so coal "production" is about 0.15% of GDP (why can't I find this number on the web). Just guessing really, I'd say that amounts to measurement error of well over 0.1% of GDP (0.1% corresonds to say that one third of the value of coal is created by digging it up which is absurdly high). OK so measurement error in coal mining value added is smaller than the effect of cap and trade on measured GDP. The reduction in the over estimate of production is only about 10% of the estimated reduction in measured production.

Mid week open thread Oct. 14, 2009

2009-10-14T16:50:00.000-07:00

Give A Man A Fish

2009-10-14T12:43:00.000-07:00

I once spent a couple of weeks asking myself, "How can a nation, or even just a city, cheaply deal with a scarcity of food for the poor, together with a plenitude of cheapbad food (whether fast or home-made) which harms ones health?" I came up with the Streetfood Initiative (still in planning, I am sorry to say.)

Up here in the great white north we have plenty of poorly fed, obese, and diabetic people. We're good -- but not perfect. Our local food bank alone fed about 36,000 people four years ago when I last looked up the data, and the numbers have risen since then.

I proposed that a network of carts and tiny kiosks be set up to give away Streetfood to anyone who asks.

It would not infringe on the fast food industry because it would not be the sort of addictive mix of fat-sugar-salt-starch that they specialize in. All offerings would be vegetarian, though spicy and nutritionally balanced. Rice, lentils, curry, stews, and stir-fry type recipes, each serving handed over in an edible container, like a hollowed breadroll or a unsweetened ice cream cone type cup, using a minimum of wrapping. Recipes would be public, on the net, and available at the cart for the asking.

The carts and kiosks would be funded through general revenue, with the understanding that savings and benefits would show up elsewhere: less diabetes, better performance in the schools, fewer malnourished drunks taking up hospital beds, fewer proud starving seniors, and so on.

How much rice, lentils and beans can you buy for what it costs to care for one blind, amputee diabetic? Lots and lots, I bet.

Another effect I hoped for (perhaps the core effect) would be to alter people's ideas of what "food" is.

We generally consider the food we grew up with to be real food, and stuff encountered later as foreign, peculiar or even non-food. Diet is partly choice, true -- but much of what we consider choice comes down to imprinting.

Jared Diamon, in his book "Collapse: How Societies Choose to Fail or Succeed": wrote about why the Norse settlements on Greenland failed. He said

"Looking back on these settlements from our vantage point today, we can observe that the Norse were imperceptibly following practices which weren’t sustainable in their environment in Greenland. These practices were as follows:
•Chopped down forests to use wood for fuel, furniture and houses
•Used cleared land for grazing cows
•Built houses out of 6-foot slabs of turf which meant a home consumed about 10 acres of grassland
These practices weren’t sustainable... Looking back the Norse Greenlanders should have learned from the Inuit to hunt seals as the most reliable food source in winter. But they preferred beef and didn’t like seal. The Norse also should have eaten fish. If they had, they may have survived."

I consider canned mushroom soup to be a staple, along with bananas, potato chips, and frozen pizza. My grandmother, born in the late 1800s, most likely would never have seen these when she was growing up.

But what if a generation of children grew up eating delicious street food? Presented correctly, it could become the circus and state-fair finger food for a whole population of youngsters, and help introduce people to a diet that doesn't subvert their health.

As for the free rider problem -- bring 'em on. In an inversion of the old saw, we could be a culture where "the wealthy, as well as the poor, are permitted to eat Streetfood all they wish."

Up here, a person generally has to be below 37% of our poverty line before they will go to a food bank. People who need the food still won't go until truly desperate. I think the potential for free riders is less than one might imagine, and meanwhile -- they will learn different tastes.

Political lawn signs

2009-10-14T02:38:00.000-07:00

by cactus

I live in a city of with less than a quarter million people. (The greater metropolitan area is larger, of course - there are well over half a million people in the surrounding area.) Since we moved here a year and change ago, its hard to avoid noticing that in this city, politics is a tough sport. The mayor apparently has a pretty strong machine going, and that's generated a lot of opposition - there was even a recall election last year though the mayor survived.

There were elections for the city council over a month ago. At the time of the election, there were lawn signs for the various candidates all over the place. Within days of the election, the lawn signs for the losing candidates disappeared. However, the lawn signs for the winning candidates are still up... and as I noted above, its been well over a month since the last election.

I don't remember seeing this phenomenon at play in other places I've lived (assorted cities and towns in Brazil, California, and Arkansas). I remember something a bit different, in fact, when it comes to presidential elections - sure, you still the occasional Obama bumper sticker, but you also still see McCain Palin stickers too. In fact, every so often I come upon a car with a Kerry or a Bush/Cheney 04 sticker. But stickers can be a pain in the butt to get off a car, whereas lawn signs require no effort at all to remove.

So what gives? Is the town small enough that this constitutes signaling to the winning candidates ("you got a supporter in this home, don't forget us!"). Is this a way of denoting membership in a favored group - supporters of a winning candidate?
_________________________________________
by cactus

A Year and Counting: re-regulation of Wall Street

2009-10-14T02:06:00.000-07:00

by Linda Beale

A Year and Counting: re-regulation of Wall Street

On Monday night, I participated in a symposium on the Financial Crisis: One Year Later, sponsored by the Center for the Study of Citizenship and others. With me were Larry Ingrassia, Business Editor of the New York Times, and Chip Dickson, CFO of W2Freedom, a private equity fund that purchases community banks. We talked about the causes and potential solutions to the financial crisis and the Great Recession that it had spawned. Much of our focus was on the way financial institutions had grown "too big to fail", creating a "casino mentality" that assumed that the government would come to the rescue if needed, thus socializing losses while privatizing gains.

As Amity, a commenter on Salon's post by Andrew Leonard on Wall Street's risk-taking, noted:

The whole point of society is to moderate and channel wild animal impulses into productive forms. In keeping with that purpose, we as a civilization once saw fit to impose on high finance a series of regulatory restrictions and frameworks for oversight so as to moderate and channel the risk-taking behaviors of financiers.

Then we as a civilization saw fit to remove those restrictions and oversight. The result was as foregone, and as predictable, as if we were stalling an aircraft and letting gravity take over.

I kicked off the discussion session of the symposium with the following question:

It's been a year now since we were hit with a financial system tsunami, and recognized that we had let banks get “too big to fail” and speculation in derivatives explode. Yet here we are, one year later—we’ve actually encouraged banks to grow larger; we have not yet enacted any regulation of derivatives; we have not yet enacted any tighter regulation of hedge funds and private equity funds or the "shadow banking" system generally, we have not yet formed a consumer financial protection agency—in fact, we’ve done essentially nothing to change the conditions that apply. What does this mean, in terms of the stability of the financial system?

I'm not sure that there is a satisfactory answer to that question. Because it suggests that our political processes are now so beholden to the corrupting influence of the financial behemoths that we will not be able to find the will to rein them in. See, e.g., Robert Reich, so much happening in D.C., so little to show for it, Salon.com (Oct. 9, 2009) (lamenting the fact that "Congress is overwhelmed with corporate and Wall Street lobbyists").
(cross posted from ataxingmatter 10/09/2009)

Update: Barney Frank and the SEC on derivatives, Naked Capitalism

Game Changing Vote On Health Care

2009-10-13T12:22:00.000-07:00

by Bruce Webb

Key Senate committee passes health care plan

The Senate Finance Committee passed a long-awaited $829 billion health care bill Tuesday by a 14-9 vote. Sen. Olympia Snowe, R-Maine, was the lone committee member to cross party lines, breaking with other Republicans to vote for the measure. All the committee's Democrats supported the bill.

The MSM will lead with Snowe, but the real story to follow is that last sentence. Neither Conrad nor Lincoln left the fold. Meaning that at first glance there is no chance they would vote to keep the merged bill from at least coming to the floor for debate (which was a possibility if they had defected on the SFC bill itself) and I would think little chance they would back a filibuster on final passage.

TPM liveblogged the vote here: LIVEBLOG: Senate Finance Committee Votes On Health Care Reform Bill

I'll be following this story all day and night but mostly not be able to comment. So consider this an open Health Care thread. I would throw one question out for discussion: Did AHIP overplay its hand by releasing the PWC Report? Because I certainly would not have predicted the Conservadems falling into line the way they did, something got them off the fence.

Child Labor Through the Strange Filter of Orthodox Economics

2009-10-13T05:03:00.000-07:00

rdan
Child Labor Through the Strange Filter of Orthodox Economics

Peter Dorman at Econospeak notes that our official line concerning child labor in international trade has little research to back it up, and tends to always say 'don't mess with trade':

There is much to endorse in the innards of the argument made by Matthias Doepke and Fabrizio Zilibotti in their recent post on Vox EU. Yes, consumer boycotts and trade sanctions are a poor way to address the blight of child labor, and double yes, income transfer programs that pull poor families out of poverty and keep their kids in school are a proven remedy. But why is it that, whatever the question, the economically correct answer is always “Don’t mess with trade”?

Actually, the fundamental problem with consumer activism around child labor is that very few of the world’s child laborers work in the export sector, and even fewer are part of the value chain for branded products. The sad truth is that first world consumers who obsess about what to buy are mainly assuaging their own conscience and not doing a whole lot for the downtrodden. Whether such activism has more costs than benefits is dubious, however, despite the authors’ assumption-laden modeling exercise.

[snip]

This crisis has many causes, but none has been more fundamental than the unsustainable imbalances engendered by the very trading system we are instructed not to mess with. It turned out that flooding western markets with goods produced by extremely cheap labor depended on western consumers piling up a mountain of debt. These imbalances have now collapsed, and they will not be rebuilt. If we are to put globalization on a sustainable footing, we will most definitely have to mess with trade, so that it can grow on the basis of a more equitable pattern of demand.

[snip]

One other item jumped out at me. The core argument of Doepke/Zilibotti turns out to be this:

"In our analysis, we find that international interventions weaken domestic support for child-labour restrictions because they reduce competition between children and unskilled adult workers in the labour market. Unskilled workers then have less incentive to push for child-labour regulation.

When effective, trade sanctions or consumer boycotts move child workers from formal employment in the export sector to informal production, often in family-based agriculture. In the export sector, particularly in factories, children and adults perform similar tasks and therefore compete directly for jobs. In the informal sector, children and adults usually have different work responsibilities."

As it happens, I have actually conducted research into the potential competitive effects of child labor on adult markets. As far as I know, no one else has investigated this empirically. It turns out that children do not always offer higher profits to employers, but they often do, and this situation is not confined to production for export. Let’s not let a little evidence get in the way of their nice, neat theorems, however.

Tanker Saga, Continued

2009-10-13T04:41:00.000-07:00

by reader ilsm

The Tanker Saga, Continued, New York Times Oct 8 2009:

Trying to recover from past mistakes, the Pentagon has initiated a third competition for a new Air Force midair refueling tanker. After two bungled attempts, defense officials, contractors and Congress really need to get it right this time.

[snip]

Another unresolved competition is definitely not in the country’s interest.

The new tankers are needed to replace the current Eisenhower-era planes. With the United States engaged in two wars and countless other missions around the globe, the Obama administration, Congress and defense contractors must ensure that, this time, a fair and open bidding process produces the best tanker at the best price to meet the Air Force’s needs.

Why must the Air Force: "replace the current Eisenhower-era planes."

The world is a totally different place than 1951. The "threats" are greatly reduced and the implied "replacing" avoids treating with the question of why have new expensive hard to maintain tankers to replace Eisenhower era airplanes. My answer is to create a fiction, a reason to spend huge sums of money which make the PAC's happy?

One of the defects in DoD weapon system acquisition is the disconnect between what is needed to provide for the common defense and what is bought under the auspices of national security. The Joint Chiefs don't identify gaps, and then the non capability gaps are not transformed into technical needs that can be delivered. A perfect circular loop with a logic vacuum.

The KC 135 was designed to complement the B 52, long before buffpilot's time. In that mission a huge number of B 52's would be refueled enroute to letting Slim Pickens ride his A bomb down on some important Soviet target.

In Vietnam a small number of the total KC 135's was sent to make light, short range fighter aircraft into heavily loaded bombers to engage in an expensive and fruitless long range bombing campaign in an unwinnable war.

Later, Air Force spending planners recognized that huge a KC 10 aircraft could be mixed as a tanker and cargo plane. First they bought 40, then they added another 20 to make 60 huge refuelers which could also carry cargo and people, and which never found a mission.

The problem with the Air Force is they want a huge tanker to do all three unnecessary, too expensive and low chance of providing for the common defense missions.

And so their acceptance criteria are 388 issues all not related to the common defense, however they make it possible to debate endlessly the merits of a selection that should not be made. But for the PACs...........

Update: by ilsm..How many hugely costly air tankers are needed to make up for bad (no or untested) specifications?

Planning to maintain a level of industry profits is not national security.

_____________________________________
by reader ilsm

D-Squared Provokes a Call to Action

2009-10-12T05:21:00.000-07:00

The close:

[W]hen the New York Times came and offered [Ross Douhat] a column, he did not turn it down saying "no, I clearly do not deserve this honour, others are far more qualified for it that me".

The NYT thinks Douhat's important because people link to him. They neither realize—nor care—that you're laughing at him. They just count the links and think he's Valuable.

Stop linking. Please. Even the thorough destructions (e.g., Dave Noon) include the trackback.

Don't include a link to Douhat. Think of the children.

Ignani and the Ignavi

2009-10-12T02:56:00.000-07:00

Robert Waldmann

AHIP The health insurance lobby just declared war on the Baucus plan. This is new, since they previously supported health care reform. It is not, however, surprising. AHIP made its condition clear, they would support health care reform provided that all were insured. Basically the individual mandate was the price for their support.

Displaying his usual inverted political genius, Baucus decided to water down the individual mandate so that some people are allowed to go without insurance. He was trying to compromise with Republicans, well in this case, with a Republican -- Olympia Snowe. Thus he violated the terms of a very clear very public agreement with AHIP. It's not as if I didn't warn on September 2 that this is a terrible idea.

Now Baucus has lost AHIP and Snowe remains officially undecided. He dumped AHIP Prsident Karen Ignani in a bid for the Ignavi (I make that plural to refer to the Divine Comedy but pretend it is to include Nelson or Lieberman or someone).

Update: Maybe I was wrong. Maybe Baucus is an even more brilliant 11 dimensional chess player than Obama (a 12 dimensional chess player) and he knew that provoking AHIP was a brilliant strategy. The line from an anonymous "finance committee aide" is that AHIP's attack is good for Baucus. The idea seems to be that Senators are angry with AHIP and don't want to appear to take instructions from AHIP (doesn't mean they don't want to take the instructions, it just means that they don't want it to be obvious as in changing their position the day before the big vote after a very public command).

Of course I assume that "a finance committee aide" would not make a totally bogus claim in support of the view that Sen Baucus is a genius and certainly wouldn't demand anonymity if the claim were totally bogus. Nahhh that's just not the way Washington works.

I'd guess that the bought and paid for insurance industry senators (definitely including Sen Baucus) aren't even capable of being good fiduciaries of insurance company shareholders -- that there obsession with compromising, watering down and settling for half a loaf (and above all pissing of the left wing of the party) lead them to water down the individual mandate which is much more critical to insurance company profits than is the avoidance of a public option.

update 2: Kevin Drum has the same theory as I do, but he writes much more goodly.

update 3: Yves Smith ways in
More comments after the jump.

Interestingly the AHIP broadside is not a press release. It is an A1 article by Ceci Conolly in The Washington Post. I thought the Washington Post was a subsidiary of the test prep industry not the health insurance industry (live and learn).

Dougj notes that The Washington Post publisher invited health industry players to pay for access to Ceci Conolly and writes "There’s a pretty strong prima facie case for pay-to-play here."

Also AHIP didn't just say the Baucus bill is a bad bill which will cause insurance premia to increase. They commissioned a study from PricewaterhouseCoopers to conduct an analysis (it must be an analysis there are lot's of numbers in it) and a frightening possible price tag. PricewaterhouseCoopers clearly explains, in the text of their analysis, that they made extreme and implausible assumptions to make the calculated number as large as possible. AHIP and PwC assume that they know how journamalism works. Journalists don't look at the assumptions or any non headline number so credibility can be bought (although I didn't know that PwC had any left to sell). John Cohn read the fine print so you don't have to.

I'm not sure if the old approach will work now that serious journalists have to worry about geeks who actually read the analysis that interest groups buy. OK I'm pretty sure it will still work.

update: looks the approach of anonymous sources praising their bosses still works.

Regulatory Capture of the USDA

2009-10-12T02:47:00.000-07:00

by cactus

Time to End Regulatory Capture of the USDA by the Meat Packing Industry

A couple years ago, I had a post looking at particularly egregious case of regulatory capture. I noted that the gubmint refused to allow a small meat packing company to test all of its beef for mad cow disease. The reason, of course, is that allowing the company to do so would set up a standard that the market might then expect other companies to meet. (Apparently the folks who believe in a free market don't believe companies should be allowed to compete on quality, where quality is measured through testing.)

For a while, this was a bone of contention with Japan - the impasse was eventually resolved by the requirement that any beef shipped to Japan undergo additional testing and certification. This weekend the AP is reporting that one of Tysons' plants (a repeat offender, by the way) got itself into trouble by shipping some no-no meat into Japan.

I particularly like this line from the story:

Gary Mickelson, a spokesman for Tyson, called the delivery of that box a mix-up.

Yeah, it was a mix-up alright. I can only assume that box was intended for American consumers.

Memo to Obama: here's a Bush era regulation that most of us would be better off without.
___________________________________
by cactus

Mashup Post: Two Marks

2009-10-11T16:24:00.000-07:00

No original content here, just two posts that make even more sense together:

Mark Thoma proves he's an economist (not just an econometrician) by reminding everyone of the Opportunity Cost of the Oughts from a long-term perspective*:
((Rdan...Attribution of the quote is in error due to a format error at Mark's...the original is from Joseph Stiglitz at Korean Herald)
[T]he worst effects were on our human capital, our most precious resource. Absurdly generous compensation in the financial sector induced some of our best minds to go into banking. Who knows how many Borlaugs there might have been among those enticed by the riches of Wall Street and the City of London? If we lost even one, our world was made immeasurably poorer.
Mark Cuban summarizes the effect of that skew in the short term**:
The beautiful thing about this country is that we like to work hard, and we like to take chances. Unfortunately, over the last 15 years, the incentives have been to take chances as a financial engineer rather than as an entrepreneur. We give far more money to people who play games with financial instruments than we give to people who come up with ideas for the next big thing. That needs to change if we want to remain a leader in this world. [emphasis his]

I have quibbles, but the direction and magnitude of the two above is correct: a massive reallocation of incentives that diverted talent from potential paradigm-shifting development to incremental risk re-allocation and obfuscation.The rest of us were just, well, marks.*Maybe more on this one later, from another angle.**Though he has a rather generous, imnvho, definition of an "investor." But even by that weak definition, his point stands.

Success of the Surge

2009-10-11T12:54:00.000-07:00

by Bruce Webb

John McCain and others have been all over TV arguing that the success of the Surge in Iraq proves that we should just go ahead and throw forty thousand more troops on top of the twenty thousand sent in March to Afghanistan. Well ignoring for the moment that where the surge increased U.S. forces by about a third and this combination of surges represents a doubling, why do we conclude that the surge was a success to start with? What was the baseline against which we have our metric?

Back in the day we had a commenter here who insisted that those of us who resisted the surge were clearly proved wrong by the calm conditions in Anbar Province, and particularly Falluljah and Ramadi, my didn't we feel silly? Well no and items like this from today show why. Deadly Blasts Target Police, Government Buildings in Iraq

Sunday, October 11, 2009; 10:33 AM
BAGHDAD -- Three car bombings targeted a police station and a government headquarters in Ramadi in western Iraq on Sunday, killing at least 18 people and underlining the precarious situation in Anbar province.

And in the same story we have this:

The bombings came a few days after a truck piled with explosives detonated outside a police station in Amiriyah, about 10 miles south of Fallujah, killing nine people. The town was once known as the stronghold of the insurgency.

The surge was marked by a sharp spike in U.S. casualties starting when troops were there in full strength in Fall 2006 and stayed high until the end of the full force of the surge the next summer, leading 2007 to be the second highest year for coalition casualties. Now certainly deaths fell off after that but some might argue that was the result of the deal Bush signed to withdraw all troops by 2010. The question is what did the surge actually buy the IRAQIS that justified so much sacrifice from the US? How is it that two years after the surge the situation in Anbar, triumphumantly held up as proof of the surge's effectiveness is now described as "precarious".

So I want to ask a version of the question posed the other day. Can we actually Score the Surge? By what numeric, social or political metric is it really a success. That less soldiers are getting killed after than during could be said for just about any battle, anywhere. Once the battle or war is won or lost relatively fewer people get killed, that is not in itself a metric of success.

I don't bring this up just to pick at a barely healed scab. In the new drumbeat for war it is held up that people who opposed the surge have been proven to be soft-headed idiots. Well can someone put that in quantifiable terms? We had an Iraqi election, and now we are going to have another one, and a lot depends of whether Maliki can pull this out. If not things might get a little messy as an Iranian friendly regime takes power. So, Got Numbers? A Hard Metric? Anything more than 'We told you so!'

Maybe the success is self-evident to everyone in the world radiating from the beltway outwards, maybe it just hasn't reached me here. But I don't see anything bought in 2006 and 2007 that we couldn't have got by having Bush sign that troop withdrawal deal two years earlier than he ultimately did.

The Fed's attempt to assuage inflation fears that don't need assuaging

2009-10-11T09:00:00.000-07:00

by Rebecca

There is no shortage of speeches by US central bankers these days. The following is an excerpt from a NY Times article that highlights the debate among key Fed officials about the speed and method of stimulus withdrawal once the decision to exit has been made:

Mr. Bernanke and other officials want to see evidence that the economic recovery is self-sustaining, strong enough to generate jobs without the crutch of extremely low interest rates.

But Mr. Warsh, as a Fed governor, has begun arguing that the central bank cannot afford to wait for irrefutable evidence of a solid expansion. Mr. Warsh recently argued that the Fed should take at least some of its cue from stock prices and other financial indicators, which turn around earlier and more quickly than the underlying economy.
...
Mr. Warsh and some other Fed officials also argue that when the time does come to change gears, the central bank may have to raise rates almost as fast as it slashed them when the crisis began.

We are far from seeing "irrefutable evidence of a solid expansion". This debate is likely confusing the public more than anything else, or as my title puts it: the Fed is attempting to assuage inflation fears that don't need assuaging. There is simply no measured inflation concern at this time, not even over the next ten years.

The chart illustrates the 30-day moving average of expected inflation for the next 5, 7, 10, and 20 years. Expected inflation, roughly speaking, is the nominal Treasury Security rate minus the associated Treasury Inflation-Protected Security (TIPS) rate, the real rate of return or the break-even rate. Technically this break-even rate is not a perfect measure of inflation expectations; but it's close and measured daily (see this SF Fed article for more on TIPS).

The "inflation problem" is way overstated in the media. Roughly speaking, markets have priced in just 1.3% annual inflation each year over the next five years, 2% over the next ten years.

By giving speech after speech (Bernanke's latest), the Fed is attempting to keep inflation expectations in check. However, the Fed is walking a fine line between alleviating concerns about long-term inflation prospects and overemphasizing the short-term disinflation (deflation) risks.

Rebecca Wilder

About

2009-10-11T07:46:00.000-07:00

About Angry Bear

Angry Bear 2009:

The Wall Street Journal, 24/7 Wall Street and Time CNN named Angry Bear among the top 25 independent economic blogs on the net.
As quoted at CNN "... Angry Bear is the product of a half dozen Ph.D economists, an historian, and financial professionals. The writers provide individual perspectives on broad sectors of the economy based on their unique training. They look at topics as varied as worldwide trade and industrial production and US government programs and regulations like Social Security."

In no particular order our current economists are Cactus, Divorced one like Bush, Ken Houghton, Spencer England, Stormy, Robert Waldmann, Tom Bozzo, Linda Beale, and Rebecca Wilder. Bruce Webb has added his expertise in particular on Social Security and current healthcare debate. Rusty(formerly Save the Rustbelt) adds his expertise on the health industry and mid-west. Noni Mausa is a professional writer and poet, who brings us a dose of reality.

Rdan: Rdan and Angry Bear blog

In alphabetical order:

Linda Beale I am a law professor at Wayne State University Law School who teaches various courses in the area of federal income tax, such as introduction to federal income tax, corporate taxation, partnership taxation, international taxation and perhaps in the future a course in statutory interpretation focussed on tax. I think that the tax system should reflect the values of ordinary Americans and our long-held belief in principles of liberty, equality and community.

I fear that we have instead tended to give too much credence to purportedly "objective" ideas about taxation based on the rationales of law and economics and unverified theories about economic growth and too little credence to human needs for community that require allocating the burdens and benefits of the tax system fairly among the people and entities that make up our system. She maintains her own blog ataxingmatter as well.

Tom Bozzo: I've worked in consulting since 1996, mostly on issues pertaining to more-or-less regulated firms — especially in the postal, telecom, and railroad sectors. I live in Madison, Wisconsin with my oh-so-non-economist wife and two preschool-age children (who would occasionally make guest appearances at my old blog), and occasionally get time on the computer when it's not being used for sessions of Elmo's Keyboard-O-Rama.

Cactus: An economist for a private corporation and author of a book to be published June 2010.

DolB: I am a liberal. A label that “progressive” is used in exchange with. I am not a radical, fascist, loony, left winged, socialist, commie. In fact, I am rather ambidextrous. Please look up all such terms before you start applying them to my writings here. I like to learn. I love to discuss such that the discussion resolves into my having learned. My qualifications as it relates to blogging at AB are generic compared to the economists here.
I have two businesses; a practice in the health care field and a retail business of flowers and plants. I have served as an officer of 2 non-profits and my state society. I have testified before my state legislature. I have personally won in my state supreme court. I have been locally politically active including sitting on a commission and the zoning board.
You can learn more personal stuff about me here here and here.

Ken Houghton: A principle in his own company and former economist for several major financial companies.

Noni Mausa: Noni is a professional writer and poet who frames economic issues in an eloquent and understandable manner.
Spencer: Before I started my own consulting business I was an economist for the CIA for 10 years and worked for a couple of Boston investment management firms as their in house economist, investment strategist for some 12 years. My original field of study was international economics and international finance.
I just celebrated the 20th anniversary of publishing SEER -- my equity strategy product. I model the S&P industries and advise portfolio managers on how to structure their portfolios by recommending industry weights.

Rusty (formerly Save the Rustbelt): Tom has 30 years involvement in health care as a CPA, management consultant, medical practice executive, public policy wonk, writer, seminar leader, and litigation analyst. His newly started blog on national health care issues can be found at Health Care Think Tank.

Stormy:

Robert Waldmann: ...born the day after Kennedy was elected (November 9 1960).
I have a PhD in economics (Harvard 1989) and teach economics at the
University of Rome "Tor Vergata". I wasn't always like this. I have a bachelor's degree in biology.
Oddly, I don't blog much at my own site rjwaldmann about economics or Italy. Currently, I am obsessed with Obama, but I'll try not to bore people with stuff they already read 10 times today.
As an economist (roughly) I am interested in behavioral economics, growth, and the economics of inequality. Actually much of my current research, such as it is, is really in econometric methodology and statistics. I was very unorthodox in the 80s, but the orthodoxy is much less rigid now.

Bruce Webb:I am by training a historian and mythologist who then has spent my working career in information retrieval and land use regulation. My interest in Social Security arose when I noticed in passing that the dates related to 'crisis' were moving but that nobody seemed to be noticing that and still less asking the key questions 'why?' and 'can this go on?' So I set out to try to answer those questions and then share the results which somehow led to a gig here at AB. Politically I am somewhat left of left of center and could best be described as a 'New Dealer' and so weigh in on more overtly political questions as the opportunity arises.

Rebecca Wilder: After receiving my Doctorate in Economics, I was an assistant professor for two years. However, I realized that teaching just wasn't for me and took a job in private sector. Now, I am an Economist in the financial industry.

As an economist in finance, I analyze data, write commentary, and offer economic insight to traders, chiefs of staff, and really anyone who wants my opinion. It is in this job that I developed a fancy for writing, but mostly I love talking about economics to anyone who will listen. She maintains her own blog Newsneconomics as well.

History of Angry Bear:
Written by Cactus

The eponymous Angry Bear blog is the brainchild of... Angry Bear ("AB"), who founded the blog in February of 2003. The title of the blog reflects his emotional reaction (anger) to his view of the state (bearish) of the state of the economy when the blog was founded. Sadly, he had cause to maintain that sentiment for quite a while.

Kash Mansori joined the blog in August 2003, and PGL arrived a year later. AB, Kash, and PGL formed the core of the blog for many years. Each has a Ph.D. in economics, but AB's focus is on microeconomic issues, Kash's are in macroeconomic issues, and PGL's training is in finance.

Neither AB nor Kash has posted here in a while, but we hold out hope for their eventual return. We also hold out hope for the return of CR, who posted for several years at both Angry Bear and his own blog, Calculated Risk. However, we can at least continue to enjoy his insights on real estate at the Calculated Risk blog.

Since 2006, Angry Bear has added more regulars - some have remained, some have stayed for a while and then moved on. Our current regulars include Cactus, Spencer, Rdan, Divorced one Like Bush, Save the Rustbelt, and Stormy, and of course PGL.In 2008 we added two economists Tom Bozzo and Ken Houghton. Bruce Webb and Robert Waldmann, Linda Beale , Rebecca Wilder and Noni Mausa are now regulars. Not all the regulars are economists by training, but then nobody is perfect.

Adam Smith in a broader context

2009-10-11T05:53:00.000-07:00

by guest poster Gavin Kennedy

(Rdan-A reader comments on the Research Agenda post on Adam Smith. The comments could not handle the volume of text, so I took the liberty of putting up the comment and the response. Good work guys):

The reader suggests Mr. Gavin consider the following quote and his explanation:
Adam Smith in the Wealth of Nations

As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.

(Reader then comments on the above quote he provided...)

Society is made up of individuals. The sum product in terms of goods and services produced by society is the output of the economy. If everyone is producing as much as they can individually, whether it be teacher, truck driver, artist, investment banker, or Michael moore, then collectively the economy is producing at an optimal level. Individuals are motivated by maximizing the things they want such as earning money, getting the satisfaction of teaching children, or making movies with a social concious while making money. Its what motivates us as individuals that is the invisible hand as opposed to some dictator or monarch trying to direct the economy and telling us all what to produce and how we are to be employed. Adam Smith was trying to offer an alternative to the tyranny and brutality of royalty. The liberals in my view want to dive is back to the days when the central authority such as the king called the shots. Us and the progressive right say not thank you...

Mr. Kennnedy responds below the fold: Research Agenda

As always with ideas from the 18th century, they are bit more complicated than they seem at first, and in what they have become to mean in the 21st century, as with the invisible hand metaphor, which after 60 years of truncated quoting and misapplying of it, its original innocence is almost lost in myths.

The partial quotation you make from the paragraph in Wealth Of Nations eliminates the actual context of which Smith wrote (WN IV.ii.9: 456). Indeed, in the truncated form you offered, the immediately previous eight paragraphs are also important (WN IV.ii.1-8: 452-55).

I urge you to read them. Should you do so, you will realise that Smith was not making a general statement about society’s “output of the economy”; he was writing about the effects on national output arising from the risk-avoidance of some, but not all, merchants who prefer to invest domestically rather than abroad because of the greater risks of overseas trade (all explained in paragraph 6, page 454) and also specifically identified in the invisible hand paragraph 9: “he intends only his own security”.

The actual “rule” that Smith, incidentally an accomplished mathematician, speaks of, is the arithmetic rule that “the whole is the sum of its parts”, in this case, the greater the number of merchants investing locally, the greater the national output and the resultant employment and “progress to opulence”.

My contributions on Adam Smith are made as an educator, not as a propagandist for this or that interpretation of Adam Smith’s writings. I cannot comment on the role of “liberals” or “progressives”, as the Atlantic divides the meanings of these words so much that they have come to mean their opposites on both sides!

Thank you for commenting on my contributions.

Open thread Oct. 10, 2009 (with GW)

2009-10-10T03:29:00.000-07:00

Green Shoots Data Defined

2009-10-09T18:57:00.000-07:00

As a rule, the Shiller Index uses the CPI as reported for All Urban Consumers (CPIAUCNS on Fred(r)).

But the Index is only updated Quarterly, so monthly data is estimated. Which produces a very interesting difference over August, not to mention September expectations:

The annualised inflation rate between June and August is 0.39%, which just shows that the trend is volatile. But if there really is another round or two of 2.5% annual inflation, the projected 3% growth for Q3 is either going to look a lot more anemic than we think, or there is going to be a major producvtivity increase.

The odds of being paid the Marginal Product of Labor just dropped a bit more.

While You're Busy Making Other Plans

2009-10-09T17:05:00.000-07:00

Two Views of The Late Great Johnny Ace:

69 Years after his birth, my eldest daughter's favorite band is The Beatles (slightly ahead of the JoBros). The main reason, apparently, is this film. (I'm trying to show her the originals on which it is based, but the best of the set is temporarily unavailable).

Score the War

2009-10-09T14:41:00.000-07:00

by Bruce Webb

Davis Obey asks some hard questions that should have been asked long ago. My eye was caught by question one which prompts the title of my post. Why insist that Health Care be budget neutral and come in below some arbitrary target? Why did we even allow these wars to be funded with Supplementals and never received a ten year score? Why not Score the War?

Chief House Appropriator Urges Obama to Change Course On Afghanistan

“There are some fundamental questions that I would ask of those who are suggesting that we follow a long term counterinsurgency strategy:

1. As an Appropriator I must ask, what will that policy cost and how will we pay for it? We are now in the middle of a fundamental debate over reforming our healthcare system. The President has indicated that it must cost less than $900 billion over ten years and be fully paid for. The Congressional Budget Office has had four committees twisting themselves into knots in order to fit healthcare reform into that limit. CBO is earnestly measuring the cost of each competing healthcare plan. Shouldn’t it be asked to do the same thing with respect to Afghanistan? If we add 40,000 troops and recognize the need for a sustained 10 year or longer commitment, as the architects of this plan tell us we do, the military costs alone would be over $800 billion. And unlike the demands that are being made of the healthcare alternatives that they be deficit neutral, we’ve heard no such demand with respect to Afghanistan. I would ask how much will this entire effort cost, when you add in civilian costs and costs in Pakistan? And how would that impact the budget?

2. Do we really believe that there is an international consensus for such a long-term endeavor, or will we in fact, with the exception of some tokenism, be going it alone? Are we really prepared to “go it alone”?

3. What policy is in fact achievable? We should be asking not what policy is theoretically the most intellectually coherent, but which policy is actually achievable given the only tools we have in the region; the Afghani and Pakistani governments. Is there sufficient leadership, popular support, and political will, not in the United States but in Afghanistan, necessary for effective governance to take hold?

4. What makes us think that a much more aggressive and expansive role for U.S. troops will not harden elements of the Taliban and make them a more potent force, forcing them to stand up to the “occupier”?

5. Does it all add up? The so-called COIN, or counterinsurgency strategy, calls for a certain number of troops and police based on a country’s population. In Afghanistan that equates to 600,000 people in uniform. But the Afghani government has never maintained more than 200,000 before. Can they really sustain a three-fold increase?

6. Do we really have the tools to overcome language, culture, history and a 90% illiteracy rate to sufficiently transform such a country?

There are many things we could do to "provide for the common defense" and more that we could do to "promote the general welfare", and maybe this one is so vital that we have to do it come what may. But if the Generals tell us this is going to be a ten year war why not be adults and have an open discussion of what that means in dollars?

Open thread Oct. 9, 2009 (no GW)

2009-10-09T13:00:00.000-07:00

Pull Quote of the Day: The Police Know The Truth

2009-10-09T12:27:00.000-07:00

From Constance Ash's discussion of Capitalism: A Love Story:

There are some scenes that that must have been shot around the period when enraged screwed-over people gathered at the New York Stock Exchange yelling, "Jump! Jump! Jump!" Moore has said in an interview, that while at the NYSE the NY cops came up to him and the crew. He told them "Hey guys, we’re just here to film a little comedy and we won’t be long," thinking they were going to run him and crew off. The cops responded, "Mike, these bastards took a billion and a half dollars out of our police retirement fund so you just take your time." [emphasis mine]

The real damage is known, and yet to come. Can we start us the term "jobless, pensionless recovery," or do we have to wait until Justin Fox realizes it?

PSA: D-Squared Rivals Quiggin

2009-10-09T10:50:00.000-07:00

I recently mentioned D-Squared's four-part review (evisceration?) of Freakonomics.

I had forgotten he wasn't finished.

Part Five is now posted. And the conceit of the pieces—"that there is something terribly, horribly wrong with the state of modern economics"—that dates back to 2003(!) is all the more validated.

John Quiggin should include all five parts as an Appendix to his forthcoming Zombie Economics book. Just sayin'.

Marginal Cost

2009-10-09T04:19:00.000-07:00

Robert Waldmann

Kevin Drum writes

Nicholas Tabarrok (brother of Alex) is a producer of small indie films. But he's frustrated because there's no way for him to increase his audience by lowering the price to see his pictures:

When I make, say, an $8M film it has to compete at the same price level as the studios' $80M or $100M film. It costs the consumer the same $12 at the multiplex.

....A few years ago Edgar Bronfman Jr, during the time his family briefly owned the Universal film studio, suggested that theaters actually charge different admission prices for different pictures so those films that cost less to make had correspondingly lower ticket prices than the mega-budget studio pictures.

I think the next time the Tabarrok family gets together Alex might take Nicholas over for a quiet chat about the concept of "marginal cost."

Oh notice the second link is to www.marginalrevolution.com

Also this is the very first time I have ever had the impression that Kevin Drum might have gained something by studying economics more -- until now his thoughts on economics have consistently dominated those of most trained economists

update: Various commenters explain at length that I don't understand how movie distribution works at all. The distributor takes a share of ticket sales not a fixed rental, so the deal with the distributor certainly does affect marginal cost.

I should have guessed that this is how it works, since we have big distributors providing insurance to little theaters and we have big distributors making sure that theaters sell tickets for the price that maximizes the revenue to be shared between the big distributor and the theaters.

revised (probably still confused) thoughts after the jump.

Marginal cost is the cost of providing one more of the product. The cost of making the master copy (you know of making the movie) is a fixed cost. The profit maximizing price for a product is a function of marginal not average cost.

OK so the price of tickets is effectively set by the distributor not the movie theater owner. What is the distributor's marginal cost ? Well it has nothing to do with the budget to make the film. That is a sunk cost when one gets around to distributing (as the cost of editing and typesetting a book is sunk and fixed, the marginal cost is ink, paper, labor operating the printing press, wear and tear of the printing press, binding etc).

The marginal cost is the distributor must give the theater owners something plus the cost of making and shipping a copy of the film (which is roughly zero). This is low. I am a bit chastened having shown my ignorance, but I would guess that most of the cost of distributing a film is the cost of advertising. Uh oh.

So there are two choices -- ticket price and advertising budget. A condition for profit maximization is that one gets the same ticket sales X by cutting the price of a ticket by Y and cutting the advertising budget by XY. I don't see the cost of making the film in that calculation.

However, I *know* that I don't understand advertising. I am personally certain that no advertisement has ever had any effect on my consumption. Most people believe that. We are obviously wrong. But this time I know I don't get it.
The key variable explaining the price of tickets is the overall elasticity of demand for that film.

Everything written below is based on total ignorance and not worth reading.

Now the marginal cost of selling a film viewing experience can be higher than the ushering and cleaning costs. If the film is sold out, no seats available in the theater, then the marginal cost is .... well huge (I guess you could show the film on another screen and send the people who wanted to see the scheduled film home saying it was sold out).

The sold out theater effect explains why matinee tickets are cheap. Yeah a super duper mega hit film might justify more expensive tickets because tickets are often sold out. But only for the first few days. I have never, ever, ever had the experience of going to a movie theater hoping to see a film and being told that it is sold out.

Notice that there is already an incentive to go to films that aren't super popular. I go to arty art flick with subtitles and I can sit where I want with no strangers anywhere near me. I go to MegaColossal and I better get there early if I want to really see the screen.

Basically so long as there are empty seats in front of each screen, it makes no difference to the theater which film you watch. Therefore it is profit maximizing for the theater to charge the same price to see each film.

message size should not exceed :-(

2009-10-09T02:01:00.000-07:00

Robert Waldmann

Does anyone hate the limit on comment length as much as I do ?
Kharris had a very interesting comment on a post of mine below. I wrote a long reply.
I can't post that reply in the comment thread so Kharris's comment and my reply are is after the jump.

Warning amateur philosophy of science below. Also I'm typing what I always type.

update: Kharris had another comment (which was not too long to post in the thread) which said much of what I said in my reply. I add that comment and my reply to that comment after the jump.

kharris
kharris
View details

Robert,
Just a quibble over terms. It might be useful to distinguish between theory and hypothesis in this discussion. And you may want to argue that what you've said stands, that hypotheses tend not to be rejected in economics, but I would argue that the hypothesis which is refuted by data in economics is generally treated the same as in physics. Rejected or accepted at the X% level, for the purposes of the particular hypothesis formalized for the particular statistical test.

Now, there are problems with formalizing hypotheses in economics that grow out of theory, and that does tend to screw things up. Starting from the assumption that multipliers are at some level a reality more or less guarantees that you can find multipliers. It is hard to imagine formalizing an hypothesis that "multipliers do not reflect reality at any level" so that it can be tested against the data.

At the level of theory, economics is a very different creature from the physical sciences. Think in terms of Kuhn. His notion is that theories don't go out of use because they are wrong. They just keep piling up troubling, contrary results until a new theory comes along that better explains the data. There is, however, no economic graveyard. Say's law still stalks the earth. Freidman admitted that the development of instability in monetary velocity mean his monetary policy prescriptions won't work, but there seem to be people who didn't notice him say it. It's a quibble, I know, but I think what policy makers are willing to accept as approximately true is theory, rather than hypotheses.

Economics can falsify hypotheses left and right. Economics doesn't seem to be able to falsify theory, except in very specific character. If Kuhn would tell us to bury it, we attach "neo" and keep marching - neo-classical, neo-Keynesian, neo-fascist.

Robert Waldmann

Good discussion. Not a quibble. I will explain how I use the terms (this is really standard in history of science and in natural sciences).

1) a hypothesis is a statement about the world which might be true.

2) a theoryNS is a hypothesis which has been tested repeatedly and not rejected.

NS stands for natural sciences. Note the word hypothesis is often used to mean "testable hypothesis" (for example in statistics). Here I am using it in it's ordinary English sense so that it might not be testable except jointly with other statements.

By this terminology, I'd say there isn't any economic theoryNS.

So what do I call that which you call a theory ? I call it the hypothesis of interest. In practice we can't test the hypothesis which interests us except along with auxiliary hypotheses that we don't care about.

So a testable hypothesis is a hypothesis of interest and a bunch of statements which don't interest us. A lot of what happens in economics is testable hypotheses are tested and rejected and economists decide that the part that was rejected was the uninteresting part and the interesting part is like a theoryNS. This is silly. It is not proven false, but the experience of adding auxiliary hypotheses, deriving testable predictions, testing and rejecting sure doesn't support the hypothesis of interest.

Somehow a statement which has never implied a true prediction gains huge status in the literature, not as something known to be true, but as a default assumption so that you can write a model in which you relax one of the default assumptions but not the others.

It is true that statements which really interest us can't be tested except along with auxiliary hypotheses which don't interest us. But there is something strange about an idea, aguess, gaining the status of a theory without ever winning any of its contests with data.

I know of few hypotheses in economics which have explained something, fit data that they weren't fiddled to fit. One of those few is the pernament income hypothesis.

Below I discuss testing it as an example.

OK I might have something actually useful to say here. Occam said "entities are not to be multiplied without need" (translated from Latin). This is interpreted as saying thatif there are competing hypothesis which fit the data, we should favor the simplest hypothesis, roughly the one with the fewest fudge factors or free parameters. "Favor" means treat as our working hypothesis which means we keep testing it until it is rejected. Maybe it even means we give advice which would be good advice if it were exactly true.

Economists interpretation of Occam's razor is quite different. In economics some simplicity is more important than other simplicity. Basically there are default assumptions (rationality, no liquidity constraints, price flexibility, perfect competition, non-increasing returns to scale, economic behavior can be understood with utility functions which give utility as a function only of consumption and leisure etc) and relaxing one of them is severely punished. On the other hand, playing with funny utility functions is OK. The list is strange. It includes statements which economists agree are false.

How did this list of statements get to be the default assumptions ? Given that hypotheses of interest can't be rejected unless you add auxiliary hypotheses, how could the list of default assumptions ever change ? What if anything does this exercise have to do with social science ?

I explain TheoryNS with an example -- the usual example.

Take Newton's model of the solar system. It was simple, 3 laws of motion plus 1 law of gravity plus the approximation that the sun and planets were rigid spheres and no other forces had measureable effects.

This hypothesis fit a huge massive gigantic amount of data. It also worked for far away stars (implications for location and red shift). It was just the most successful hypothesis ever. So it was called a theory. It has been rejected by the data, but it only was called a theory after it had been tested and not rejected with masses and masses and masses of data.

Economists try to test a hypothesis of interest and get nowhere.

Say we are interested in the permanent income hypothesis and we want to test it with aggregate data, so we have to add the auxiliary hypothesis that aggregate demand can be represented as demand by a representative consumer. Oh we also have to assume that utility functions are time separable and separable in consumption and everything else. Now we test the testable hypothesis and obviously it's false.

The result is that the permanent income hypothesis is a default assumption. You can write a model with liquidity constraints, but, somehow, the economists version of Occam's razor punishes you.

kharris
I bring up the difference between hypothesis and theory in part because in lay and political discourse, the notion of "theory" is often misunderstood. Darwin's theory gets a bad rap because it's "just a theory" form people who misunderstand what a theory is, take a theory to be an educated guess. Science attaches "hypothesis" to an educated guess. Theory is what we attach to broad, elaborate explanations of general phenomena. Generally, theory also implies "as well-founded as any explanation we have for now" - but not in economics.

Robert Waldmann

Oooops. Kharris, I responded at great length to your comment above. Js-kit wouldn't let me post my comment here so now it is a blog post.

The point I was making at gruesome length is almost exactly what you wrote right here

"Generally, theory also implies "as well-founded as any explanation we have for now" - but not in economics."

I will put your second comment in the post. Also I will quibble.

I think that standard economic theories are as well-founded as any explanation we have for now. That is an easy standard to meet if we have no well-founded explanations at all.

I think that in natural science a theory must not just be the best available explanation (which means fits the data with the fewest fudge factors) but also a clearly good or well founded explanation (which means fits a huge amount of data with few fudge factors).

I think there is a simple operational definition of a theory. A statement is a theory when it becomes impossible to remember all the data which it fits. The usual example is that it is impossible to remember all of the data of where planets were except to recall it all fit Newton's model except for the precession of the orbit of Mercury. It is impossible to remember all of the anatomical and DNA sequence data that fit's the theory of natural selection except by remembering that unimportant anatomical details and DNA sequences are what one would expect if the theory of evolution by natural selection were true.

This means that theorists who are making a new hypothesis and want it to fit known data must learn and use the existing theory. So Einstein had to make sure that his theory of gravity had the same implications as Newton's for moderate densities, velocities, pressures and sheers. So special relativity gives Newtonian mechanics as an almost perfect approximation for speeds far below the speed of light. So the neo Darwinian synthesis (due to August Weisman not just Darwin) had to give the same implications for minor anatomical details as Darwins semi Lamarkian theory.

Theorists bow to old theories and not to raw data, because it is simply impossible to remember all of the raw data correctly summarized by the old theory.

Clearly there is no such thing in economics. There is a bit of it. Old Keynsian equations become stylized facts which must be explained even after theorists turn up their noses on them as theory.

Support for Opt Out Public Option

2009-10-08T19:29:00.000-07:00

Robert Waldmann

There is a surprising consensus for having a public option but allowing states to opt out.

Paul Krugman likes the idea

Josh Marshall likes the idea (and notes that Sen Schumer likes the idea)

DailyKos frontpager McJoan likes the idea

In that post Mcjoan also notes that Max Baucus and Howard Dean support the idea

Here McJoan notes that senators Stabenow, Menendes and Ben Nelson ! like the idea

Yes Ben Nelson and Paul Krugman agree.

The idea. You read it here first.

The point is that it sounds like a compromise which is federal and respects state's right *and* it forces opponents of a public option to reveal that they oppose it not because it would be bad for policy holders but because it would be bad for insurance companies.

As Krugman writes

"the idea of putting red-state governors on the spot, having to decide whether to deny their voters cheaper policies, definitely has some appeal."

update: digby likes it too.

Got greedy and checked Jane Hamsher who is against opt out. Ooops.

A Research Agenda

2009-10-08T08:31:00.000-07:00

cross posted with Gavin Kennedy

Rdan here...Gavin Kennedy in his blog Adam Smith's Lost Legacy notes how the 'invisible hand' is used in modern economics and especially the media, and begins to lay out the challenge. The entire post follows:

Monday, October 05, 2009

A Research Agenda

“Even Adam Smith, the canny Scot whose monumental book, ‘The Wealth Of Nations’(1776), represents the beginning of modern economics or political economy – even he was so thrilled by the recognition of an order in the economic system that he proclaimed the mystical principle of ‘the invisible hand’: that each individual in pursuing his own selfish good was led, as if by an invisible hand, to achieve the best good of all, so that any interference with free competition was almost certain to be injurious. This unguarded conclusion has done almost as much harm as good in the past century and a half, especially since too often it is all that some of our leading citizens remember, 30 years later, of their college course in economics.”

(Paul A. Samuelson, Economics: an introductory analysis, 1st edition, p 36, 1948, McGraw-Hill, New York.)

Comment
This paragraph, from one of the world’s most popular textbooks by the distinguished Nobel Laureate, Paul Samuelson, encapsulates the modern myth of the invisible hand, which is often sanctified with the other myth that Adam Smith was its original inspiration.

Samuelson’s warning that the “unguarded conclusion” had already done “as much harm as good” was soon discarded and was as soon forgotten by his colleagues (including by Samuelson himself in the eighteen editions of his textbook, Economics, that followed to 2009).

The metaphor of “an invisible hand” is now ubiquitous in almost all economics textbooks (miss-teaching generations of students), in many articles in peer-reviewed journals, in campus lectures, policy statements, political debates, mainstream media, and among scores of economic Blogs across the global Internet.

My current research is about the making of those myths from their early beginnings in the 20th century up to today’s treatment of the “invisible hand”, its credibility somewhat mixed of late following the global “credit crunch” of 2007-09, and what might be the main causes of its popularity, how it developed into a “Panglossian” error of perception, why it is mythical and why the popular belief that it is related to anything written by Adam Smith endures even when the evidence to the contrary is so strong.

In writing about the history of an idea throughout a period from the 1770s to the 21st century there is a danger that the appeal limits itself to a tiny band of specialist historians, presumably divorced from the interests of modern readers.

Well, that may be the case if my subject was, say, a history of the anachronistic labour theory of value, more suited as a PhD subject. But the essential beauty of a study of the evolution of the metaphor of the “invisible hand”, and its promotion into a major “idea”, “concept”, “theory”, even “paradigm” of economics, is that despite its longevity (much older than Adam Smith’s ambivalent use in the 18th century), the metaphor in its modern forms entered serious discourse and gained its undeserved credibility among academics and policy makers at the highest-level of politicians in the world’s legislatures, who applied its implications in their real “hands off” versus “hands on” treatments of the economies they managed.

In short, from the 1950s onwards, the metaphor of the invisible hand became operational, and not just descriptive, in practice.

How and why did this happen? What have been, and are, the consequences for economic policy and practice? What evidence is there, besides Samuelson’s 1948 warning about it doing “almost as much harm as good”, that any economists over the past 60 years realised the emptiness of the myth? What happened from their belief in Panglossian outcomes from mythical invisible hands to their actual policy recomendations? Does modern capitalism need the invisible hand myth or would it be better off without it?

These and related themes are the central questions to be addressed throughout Lost Legacy.

Cochrane Vs Krugman

2009-10-08T03:16:00.000-07:00

Robert Waldmann

Look everyone is bored with this but I promised an e-mail correspondent that I would write about it. I can't force myself to read Cochrane, but I obviously just read Fox's quotes of Cochrane. I think I have something new to add to the pointless discussion of professor Cochrane.

Warning: I go too far after the jump.

I think he isn't just ignorant, I think he is dishonest.

According to Fox, he wrote

"The centerpiece of our crash was not the relatively free stock or real estate markets, it was the highly regulated commercial banks."

Now he can't believe that the commercial banks were more central than investment banks. No one could be that ignorant. He also can't fail to have noticed that commercial banks are more tightly regulated than investment banks (especially recently after capital requirements for investment banks were massively relaxed). Writing "commercial banks" when everyone knows that "investment banks" would be closer to the truth is not plausible ignorance.

Cochrane may be completely ignorant about the macro literature except for that recently written somewhere near a great lake, but he must know that investment banks suffered more dramatically than commercial banks. I'm not sure he has noticed that there are no longer any investment banks -- that is all banks in the US are now parts of partly FED regulated firms, but I am sure that he knows that Bear Sterns, Lehman, and Merrill Lynch are not commercial banks.

One more thing about Fox, he concedes that Krugman's arguments are not based on formal models, he fails to note that the arguments made by the Fresh water economists aren't based on any models at all.

I'd be the first to agree with Cochrane that Krugman's vigorous pro-stimulus arguments are based more on hunches and guesswork and politics and history than on any kind of rigorous economic model. I've been even less impressed, though, with anti-stimulus arguments that claim to be based on rigorous models but are utterly devoid of historical perspective, curiosity and common sense.

They have models in which the labor market clears, they are not quite crazy enough to argue that there is no unemployment right now. They make arguments which don't make sense and which certainly are less based on any formal model than Krugman's arguments. Fox clearly knows this. That's why he puts in the disclaimer "claim to be based". However, he is a journalist so he can't note that the arguments are definitely not based on formal models. This is he says she says journalism. I'm sure Fox has read Krugman and DeLong on the lack of a model behind the arguments. It is easy to see if there is a model or there isn't (hint there are models on Krugman's blog -- Fox can check if Fama or Cochrane have presented a model which supports their conclusions. He can ask them to send him their model. He should be able to tell if there is a model of if there isn't and if the model leads to the conclusion.

Justin Fox assumes that economists are the only people who have used mathematics

2009-10-08T02:21:00.000-07:00

Robert Waldmann

Justin Fox writes

That in itself is an interesting switch, and I wish Krugman had more directly confronted his transformation from guy who extolled "the scientific-mathematical outlook that is arguably the true glory of our civilization" to guy who writes that "the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth."

Since I absolutely agree with both of those statements right now, I detect no transformation. Fox asserts that if Krugman thinks that great things have been accomplished using the mathematical scientific approach then he must think that great things have been accomplished in economics by economists using the mathematical scientific approach.

His assertion that there is a transformation makes no sense if one considers the possibility that non economists, say physicists for example, might have accomplished great things using the mathematical scientific approach.

I'd say that economists have not accomplished much using the mathematical scientific approach, because economists almost never use an approach which is both mathematical and scientific.

The defining characteristic of science is that it is empirical and that hypotheses which are rejected by the data are abandoned (OK so the defining characteristic is that there are theories which bow to facts, just collecting facts is something else).

This is absolutely not true of mathematical economic theory. Rejected hypotheses are still maintained when we look at other subjects. Policy advice is guided by the assumption that rejected hypotheses are approximately true. The fact that a rejected hypothesis may still be a useful approximation is regularly interpreted as implying that famous hypotheses introduced by famous economists must be a useful approximation to the truth. Given that method of reasoning about the world, evidence is irrelevant (I give examples below).

In contrast there are economists who have committed science (examples, David Card, Larry Katz, John Bound, John Van Reenen, Claudia Goldin, Bruce Meyer, Alan Krueger, Christina Romer, Joshua Angrist and Richard Freeman). However, they all use quite little mathematics (in their science anyway). They do use theory -- that is they attempt to determine causation from correlation by making identifying assumptions (that is assuming something is exogenous and is an uncaused cause). However the theory is theory which is immediately comprehensible to the man on the street and immediately convincing. For example, Angrist assumed that a special relationship between day of birth and wages for US men who turned 18 during the Vietnam war which is correlated with their draft number (dates were picked out of a big jar at random by two generals in the draft lottery) probably shows the effect of being subject to the draft. That is an assumption, theory brought to the data (such assumptions are always needed). It is one that normal people will immediately agree is reasonable (if they can imagine that it could conceivably be false). (the reader will note that Robert Waldmann is not on Robert Waldmann's list).

There is mathematical economics and there is scientific economics. The overlap is minimal.

Fox is writing about the debate between Krugman and Cochrane. He argues that Cochrane is nothing like a scientist. He seems not to have thought about that when deciding that if Krugman thought that there is wonderful mathematical science then he must have thought that there was wonderful mathematical scientific economics.

Fox assumes that Krugman was like a cargo cultist who assumes that since physicists have achieved great things applying mathematical tools then it must be that economists who do something like what physicists do will achieve great things. This sort of idiocy is widespread, but Fox presents no evidence that Krugman ever shared it. He has always argued for theoretical work which presents models as examples of what might be going on -- that is as a way to clarify thought and not as something to be taken seriously (in the sense that Sargent uses that word). He has long complained that the only science that economists know exists is physics (by the way the ignorance of economists about biology is astounding -- they seem to have no idea that so much was accomplished with so little math).

Now Fox might have a case that Krugman has transformed. I too have the sense that his views have changed. However he doesn't make this case. I conclude that his comment on how Krugman has transformed is Ballance.

Well that was a long tirade about an aside.

Examples of assuming a famous hypothesis *is* (not may be is) approximately true even if it is rejected by the data.

1) Mankiw on Modigliani & Miller in a discussion of Baker, DeLong and Krugman at Brookings he said that dividends don't matter to first order because dividends didn't matter in the Modigliani-Miller model which was the first neoclassical model to address the question.
2) Lucas said we know that there is Ricardian equivalence (the time he asserted that the balanced budget multiplier is zero because without a deficit "there is nothing for the multiplier to multiply).
3) Solow to Katz that Harvard didn't have to raise salaries of junior faculty as it wasn't having trouble filling the positions. Solow is one of the rediscoverers of efficiency wage models in which he asserts that this reasoning is invalid.
4) Krugman argued that the policy implications of old growth theory with perfect competition are correct 20 years ago when his academic work consisted basically of models which fit that data better in which the policy implications are different.
5) Barro estimated a fiscal multiplier of 0.8 and concluded it would be best to "start with" models in which it is zero. Then he contributed to the policy debate assuming it was zero.

What is a Bank, then?

2009-10-07T20:00:00.000-07:00

I was trying to avoid mentioning this, partially because I half-suspected it was deliberately over the top, and I'm not reading tone well these days. After all:

Virtually every BHC has elected to become an FHC. Under 12 U.S.C. § 1843(k)(4)(H), FHCs are allowed to make "merchant banking investments" in nonfinancial companies, on a principal or agency basis, through affiliated private equity funds or other invesment funds. (Private equity affiliates are dealt with at length in 12 C.F.R. § 225.173.) Goldman carried out the investment in Greely Automotive Holdings through one of its private equity funds, GS Capital Partners VI Fund LP.

I find it very difficult to believe that any serious bankers, no matter how "annoyed," wouldn't have known this. [links in original]

is difficult to treat seriously, given the infodump being followed by the snideness. But so it goes.

Until today, when Brad DeLong made it ones of his links of the day. Because now we have to go into context and depth, and remember a year ago.

Bear was sold to JPMChase in March. Six months later, IBs still had not lowered their leverage ratios, and credit was more difficult to find. So the IB that had six months to return to some semblance of sanity—Lehmann Brothers—dangled on the edge for a while and finally fell off, "murdered" we're now told. (Whether it was murdered by its own CEO is left as an exercise.) But the best was yet to come.

So the weekend was going to be a rocky one. And various plans in various stages were executed:

Endangered IB #3, the successor firm to Merrill Lynch Pierce Fenner & Smith, looked around for a sucker, saw Ken Lewis, and locked in their bonuses.
Endangered IB #4, the successor firm to Dean Witter Sears, teetered on the edge, hoping for a life preserver. And, apparently, it was more like Leo-in-Titanic than anyone wanted to admit.
Endangered IB #5, The Vampire Squid, called its buddies at Treasury.

Maybe it didn't go exactly like that, but by the end of the weekend, there was the declaration that, so long as they re-incorporated as a Bank Holding Company (BHC), IB#4 and IB#5 would have full access to ~~loot~~support from the U.S. Treasury.

And now we are told—in answer to the question Simon Johnson initially raised:

If this is temporary, is it envisaged that Goldman will cease being a bank holding company, or that it will divest itself shortly of activities not usually allowed (and with good reason) by banks? Or will all bank holding companies be allowed to expand on the same basis. (The relevant rules appear to be here in general and here specifically; do tell me what I am missing.)

Increasingly, the issue of “too big to regulate” in the public interest is being brought up – an issue that has historically attracted the interest of the Department of Justice’s Antitrust Division in sectors other than finance. Should Goldman Sachs now be placed in this category? [italics mine; links, again, from the original]

The response appears to be that those regulations can be circumvented with impunity. Or, as Simon unbelievingly snarked initially, Goldman is doing nothing any other bank cannot do.

But all that does is beg the question: if a BHC can do everything that GS used to be able to do, what was the actual cost to Goldman and Morgan Stanley of converting their business. Or was it just a way for the Fed to save face while letting the taps flow wide?

Baucus Mark: CBO Preliminary Score

2009-10-07T14:10:00.000-07:00

by Bruce Webb

CBO letter to Baucus

Estimated Budgetary Impact of the Amended Chairman’s Mark According to CBO and JCT’s assessment, enacting the Chairman’s mark, as amended, would result in a net reduction in federal budget deficits of $81 billion over the 2010–2019 period (see Table 1). The estimate includes a projected net cost of $518 billion over 10 years for the proposed expansions in insurance coverage. That net cost itself reflects a gross total of $829 billion in credits and subsidies provided through the exchanges, increased net outlays for Medicaid and the Children’s Health Insurance Program (CHIP), and tax credits for small employers; those costs are partly offset by $201 billion in revenues from the excise tax on high-premium insurance plans and $110 billion in net savings from other sources. The net cost of the coverage expansions would be more than offset by the combination of other spending changes that CBO estimates would save $404 billion over the 10 years and other provisions that JCT and CBO estimate would increase federal revenues by $196 billion over the same period.1 In subsequent years, the collective effect of those provisions would probably be continued reductions in federal budget deficits. Those estimates are all subject to substantial uncertainty.

For some reason the Table came out smaller than usual, in any event click to enlarge.

I haven't read through this and will make only two preliminary notes. One the bill leaves $81 billion in wiggle room to allow changes and still not break Obama's (rather foolish in my mind) demand that it be deficit neutral. Two is that on the cost side it is way under Obama's $900 billion leaving plenty of room for additions as long as corresponding funding is found for any thing proposed in excess of the $81 billion. Now if the Senate Finance Committee can just get this thing voted on and approved we could get this show on the road.

g7-vs-g5-in-charts

2009-10-07T06:45:00.000-07:00

by Rebecca
Cross posted from Newsneconomics

These are interesting times in global economics, especially from the policy perspective. And although there was a sense of global urgency across the G7 (Canada, France, Germany, Japan, Italy, UK, and US) and the G5 (Brazil, People's Republic of China, India, Mexico, and South Africa) late in 2008 and early in 2009, policy makers now face very different economic circumstances. The global downturn was (mostly) ubiquitous, but the upswing will not be. The G5 are likely to initiate explicit exit strategies before the G7, as growth, domestic demand, and inflation rebound first.

The downturn in the developed world was very severe, as illustrated by the sharp contraction of GDP of the G7 countries. And across the G5, some countries experienced similar declines, however given the nose-dive that was global trade, the economic resilience via expansionary policy in India and China has been rather remarkable.

Domestic demand, underpinned by robust fiscal and monetary policy pushed auto sales forward in the G5 and simply offset some of the decline in retail sales in the G7 (see charts below). I used auto sales in the G5 as a proxy for retail sales, as I could not access a retail sales in India (not even sure they offer the statistic). Impressively, though, retail sales remained strong in the UK. Auto sales in China, Brazil, and India have been hot - the real question here is: what is the underlying demand for goods and services in these countries, especially in China.

Monetary policy - driving down interest rates in order to stimulate consumption via the credit markets - was very successful in the G5, but much less so in the ailing G7.

And finally, inflation has been quite resilient in some countries, notably in the UK and India. As such, the Bank of England has a real trade-off with which to contend: inflation (as measured by the CPI), 1.6% over the year, remains sticky and remarkably close to target, 2.0%. The Reserve Bank of India is seeing food prices drive inflation steadily upward. http://online.wsj.com/article/SB125439928727956013.html?mod=googlenews_wsjSome expect India to be one of the first emerging markets to start tightening (The Bank of Israel was the first).

There are a lot of question marks right now - the biggest is when central banks and fiscal authorities start to pull back. Especially in the G7, too early and one risks the feared W, but too late, and inflation becomes an issue.

Across the G7, rate hikes are unlikely to occur until well-into 2010, and maybe even 2011 for some. Across the G5, however, late 2010 is more likely an upper limit, however, some countries like Mexico are seriously struggling and policy will remain loose for some time. (See RGE Monitor Nouriel Roubini's latest, "Thoughts on Where We Are" - unfortunately, a subscription is required.)

Medicaid Dilemmas – Part 1

2009-10-07T05:50:00.000-07:00

by Tom aka Rusty Rustbelt

Medicaid Dilemmas – Part 1

Medicaid is a federal/state program covering poor people, with general services for all ages and long-term care (nursing home) services for the indigent elderly.

State budgets are extremely tight, and many states are cutting reimbursements, including nursing home reimbursements.

The majority of long-term nursing home residents (as opposed to short stay rehab patients) end up being Medicaid funded.

A typical long-term resident is an 84 year widow, suffering from moderate senile dementia, having ambulation problems and problems with activities of daily living (eating, dressing, bathing), with late onset diabetes symptoms, osteoarthritis and congestive heart failure. So, grandma is not a candidate for home care or assisted living.

Many residents are in much worse health. Some receive joint services from the facility and from hospice.

Nursing homes have the toughest regulatory regimen of any health care providers, including piles and piles of mandatory paperwork by nursing and administrative staff.

So, not much room to cut (the best profit comes from selling the facility later). Now what?

In Part 2 we will discuss the possible next phase for state Medicaid budgets.

(The wife, aka the world’s greatest nurse, works part time in long-term care, and will now do more work and take a pay cut. She understands the deal, but one of these days she is going to hang up her stethoscope, a real tragedy for the elderly. Maybe she will become an investment banker – nah, too honest.)
______________________________________
Tom aka Rusty Rustbelt

The Logan Act...if you are curious

2009-10-07T02:30:00.000-07:00

rdan

The Logan Act has remained almost unchanged and unused since its passage. The act is short and reads as follows:

Any citizen of the United States, wherever he may be, who, without authority of the United States, directly or indirectly commences or carries on any correspondence or intercourse with any foreign government or any officer or agent thereof, with intent to influence the measures or conduct of any foreign government or of any officer or agent thereof, in relation to any disputes or controversies with the United States, or to defeat the measures of the United States, shall be fined under this title or imprisoned not more than three years, or both.

This section shall not abridge the right of a citizen to apply, himself or his agent, to any foreign government or the agents thereof for redress of any injury which he may have sustained from such government or any of its agents or subjects.

Labor market rents can cause business cycles

2009-10-06T18:12:00.000-07:00

Robert Waldmann

I'm not sure whether (more likely wherE) this has been noted in the literature, but wage differentials not due to differences in workers' skill are enough to generate a business cycle. A verbal "model" after the jump.

update: additional model with fixed capital added.

The key reference from which this is not quite obvious is Kevin Murphy Andrei Shleifer and Robert Vishny (1989) "Industrialization and the Big Push" Journal of Political Economy vol 97 pp 1003- which contains three models only one of which is The Big Push. Another discusses wage differentials not due to worker characteristics. Since Murphy is one of the authors, they are assumed to be compensating differentials not labor market rents but it doesn't matter (except for welfare analysis).

OK the problem: Assume that workers all have the same skill yet different wages are paid in different industries. Can this imply multiple Pareto ranked steady states ? Can this imply that there are sunspot equilibria in which GNP changes just because people expect it to change ?

To make the problem hard, assume that everyone is rational, that there is perfect competition (except for the wage differentials) and that all goods are non durable so consumption must equal production and the real interest rate just makes aggregate demand equal aggregate supply.

The last assumption is needed, because a model with two sectors can have a sunspot equilibrium due to the effect of (spontaneous just because people expect it) sectoral shifts on the real interest rate (Boldrin and Rusticchini in Econometrica). I find models which rely on the effect of changes in the real interest rate on the rate of growth of aggregate consumption or labor supply to be unconvincing as there is almost exactly no sign of such effects in the data (that criticism applies to 3 published papers with my name on them).

OK the "model." Time is continuous. People are free to borrow and save at interest rate r. They have a rate of time preference rho

There is no capital. There are two non-durable goods produced with labor alone. There is nothing odd about good 1. One unit of it is produced with 1 unit of labor.

1) C_1 = L_1

where C_1 is consumption of good 1 and L_1 is employment in the sector which produces good 1.

The price of good 1 is normalized to 1. There is perfect competition so w_1 (the wage paid in sector 1) is equal to 1.

One unit of labor is needed to produce good 2

2) C_2 = L_2

total labor supply is fixed L_1+L_2 = L

However for some reason (it's ok except for the welfare analysis if its a comepensating differential, that is it is more unpleasant to work in sector 2)

3) w_2= a > 1

there is perfect competition so the price of good 2 P_2 = a.

update 5: I am assuming that each individual worker moonlights working in both sectors and that they all spend the same fraction of their time in each sector. In other words I am making assumptions so that all individuals have exactly the same income. This is silly but makes things simpler.

Now a knife edge very special case for clarity. The goods are perfect substitutes

U = aC_2+C_1

This means that any C_2+C_1 = L can be a steady state equilibrium.

Welfare equals (L + (a-1)C_2)/rho = (aL-(a-1)C_1).

For this knife edge special case, there are a continuum of Pareto ranked steady state equilibria. People are better off if they work in sector 2. Any number can work in sector 2.

Well that's an extreme example. Now how about this one Good_1 is an inferior good. This means that for fixed relative prices (and relative prices must be fixed) there is an interval of total consumption over which consumption of good 1 declines.

update 3: I think I was totally confused here
update: Assumption immediately below is a correction of the assumption in an earlier version. Sad to say the new assumption is the assumption which I hate.

Consumption/permanent income decreases as the interest rate increases

permanent income is the expected discounted value of the flow of income. Call it pY.

Oh no now I need a graph.

Figure 1

Consider possible steady states. Consider income and consumption of good 1. The line shows income as a function of consumption (and production) of good 1 . The curve shows consumption of good 1 as a function of pY.

Note there are two steady states and one is Pareto better than the other (C_2 is higher).

OK now figure 2 shows Y as a function of pY.

Define total consumption as C = C_1+aC_2

So there are two steady states one with high output Yg and the other with low output which I will call Yb.

What's more the economy can jump from one to the other. let's say it switches according to a poisson alarm clock with the sunspot causing a switch arriving at rate p. Or hell let's say time is discrete and they switch each period with probability p.

In each steady state consumption equals to income so that the identity C=Y and the equations which give C_1 and C_2 as a function of y (for P_2 fixed and equal to a from the supply side) and Y as a function of C_1 and C_2 both hold.

Furthermore the economy can jump stochastically from one to the other. How ? Well lets say we are in the good state. The national income identity means C=Y. However individuals are free to borrow and save at interest rate r. They decide consumption given permanent income. This means that r can't equal rho. They know that their income might fall so if y=Yg all agents will try to save if r=rho. They can't. we must have C=Y because there is no way to invest.

So r must be lower than rho. This means that they are satisfied if the expected marginal utility of consumption increases. It does it jumps up to the higher marginal utility of consumption in the bad steady state with rate p. For any p r can be calculated so that people neither want to borrow nor save if they are currently at the good steady state.

Similarly at the bad steady state. Here r must be greater than rho since income and consumption might jump up.

update 4: Now I add capital to the model. The model above is very strange as there is no fixed capital or trade so consumption must always be equal to production. Also one of the stylized facts about wages, and, in particular, wages which are surprisingly high given worker characteristics is that they are high in industries with a high capital labor ratio. In the model above, both industries have a capital labor ratio of 0.

So now there is a third good K in addition to C_1 and C_2. At any given time total capital equals K = K_1+K_2 where K_i is capital used in sector i. Y_1 and Y_2 are production of each type of good no longer equal to C_1 and C_2. Y = Y_1+Y_2 and C=C_1+C_2

The assumption about wages becomes

5) w_2 = (w_1)a

since now wages depend on the capital labor ratio.

I will assume that the share of capital is constant and the same in each industry. This means that the relative prices of the goods will be constant. For further simplicity I am going to make assumptions so that constant is 1 so P_2 = P_1. This is all for tractability and is not realistic. In fact not only is K/L high in high wage industries but so is the share of capital (capital income)/wL which will be just rK/wL here. But I assume that rK/wL = alpha in both sectors cause it makes things easier. I equations I assume

5) y_1 = A(L_1)^(1-alpha)(K_1)^alpha

and

6) Y_2 = A(aL_2)^(1-alpha)(K_2)^alpha

So both sectors have similar Cobb-Douglas production functions. For the same amount spent on labor and capital (which means fewer physical hours of work in industry 2 since each gets a higher wage) the sectors have the same output so the two goods are sold for the same price which I set to 1. This makes everything relatively simple and means that the crude definitions like Y = Y_1+Y_2 make sense.

I want to keep things simple so I will assume that you can create 2 units of K from 1 unit of good 1 and one unit of good 2. This is an absolutely rigid no substitution allowed leontief type function. capital depreciates at rate delta. so

5) dK/dt = -deltaK + 2min(Y_1-C_1,Y_2-C_2)

This means that

6) dK/dt = -deltaK + (Y-C)

and the price of one unit of capital is 1, that is equal to the price of one unit of consumption good 1 which is equal to the price of one unit of consumption good 2.

I assume that delta is high enough that no one ever wants to convert K back to consumption goods (or that they can do that which is silly but standard). Also I assume either that delta is high enough that no one ever wants to take capital from sector 1 and add it to sector 2 or that this is possible. Again silly but standard.

Note that a shift of labor from sector 1 to sector 2 will increase demand for capital and will give a higher marginal product of capital r for the same total amount of capital K.

Finally I will make an assumption about tastes. For p_1/p_2 = 1 (which it must be given the supply side) C_1 and C_2 as a function of total consumption are given by figure 3. As C goes up from zero the ratio C_2/C_1 is constant for a while, then C_2/C_1 increases then it is constant with a higher C_2/C_1.

In the regions where C_2/C_1 doesn't change with total consumption C, this model behaves just like a standard Solow model. However, when C_2/C_1 is higher it is as if there has been labor augmenting technological progress since labor is more productive in sector 2.

Recall I am assuming all workers divide their time and work in both sectors and have equal identical income. I also they are the saver/ investors and all have equal wealth so everyone always has the same income. Silly but standard in macro.

This means that, for the right a and assumptions about tastes, there can be two steady states again. In each steady state the real interest rate is equal to the rate of time preference r=rho, but in the good steady state C_2/C_1 is higher than in the bad steady state so the K/L needed to make r=rho is higher and output is higher and consumption is higher so, given tastes the ratio C_2/C_1 is higher.
Define the two steady state levels of capital as Kg and Kb with Kg>Kb and may use the subscripts the same way for other variables.

It is no longer possible to jump from one steady state to another. K is a state variable and changes slowly. C can jump.

There is a sunspot equilibrium where the economy spends much of it's time near one of the steady states.

If K is just above the good steady state K (Kg) then rrho.

If it jumps the economy finds itself on the path of dC/dt and dK/dt which leads to a point with K just below bad steady state K. Once it gets real close to this point, the sunspot begins giving a jump up signal which arrives at rate p again. This makes consumption remain constant if the jump up signal doesn't arrive at a point where r>rho so K below Kb.

If the jump up signal arrives then C jumps up to the region with high constant C_2/C_1 to exactly the point where the dC/dt and dK/dt equations lead it to the original point with K a little bit greater than Kb.

Also now the economy can have much more complicated dynamics. It is possible to make an equilibrium in which it can jump at any time and not just when close to a steady state.

update 3: I think everything below is totally confused

Note again two steady states. Also note that for the Pareto better steady state (with higher Y) dY/dpY >1. This means that this steady state is a stable steady state with Y = Yg (for good). if Y starts slightly above steady Yg then it will converge to steady Yg. This means that there is a sunspot equilibrium in which Y bounces around Yg just because people expect it too (rational animal spirits).

update 2: The assumption which I hate that, given permanent income, consumption decreases in the interest rate is not needed for there to be a stable steady state and sunspot equilibria. It is just needed so that the good steady state is stable. If, in contrast, consumption increases in the interest rate for given permanent income, then the bad steady state is stable. There is a very general result that when you pass from zero steady states to two (as in the figure) then one of the steady states is stable and one is unstable.

I will attempt to discuss the dynamics of Y near a steady state. I will use linear approximations (I have to do this to have any hope of writing out the explanation with plain ascii. That approximation is not necessary for the result.

There are two steady states Yg defined above and the one with lower Y which I now name Yb.

I will try to find the time derivative of Y, dY/dt for Y near a steady state. If d(dY/dt)/dY is negative then when Y is above the steady state Y falls down to the steady state. This means that the steady state is a sink, it is stable. It means that there are sunspot equilibria where the economy bounces around the steady state.

I will make an assumption about the utility function. First define total consumption

C = C_1+aC_2

note that C=Y.

Given the relative price P_2 = 2P_1, C_1 and C_2 are functions of C.

I assume that
the marginal utility of consumption of good 1 is equal to

4) U_1(C_1,C_2) = C^(-sigma)

This must be equal to (1/a) times the marginal utility of consumption of good 2.

Now consider the real interest rate r. Even though there is no saving and investment, there is a market clearing r such that no one wants to save or borrow.
Equation 4 implies that

5) (dC/dt)/C = (r-rho)/sigma = (dY/dt)/Y

(recall the national accounts identity is just C=Y).

now consider constant r (just for now)

permanent income at t (pY_t) is the integral as s goes from zero to infinity of exp(-rs)Y_(t+s)ds

Given 5 that equals the integral as s goes from zero to infinity of

exp(s(r(1-sigma)-rho)/sigma)Y_t so

6) pY_t = Y_t(-sigma/(r(1-sigma)-rho))= Y_t(sigma/(rho+(sigma-1)r)

if r = rho then pY_t = Y_t(sigma/sigma) = Y_t

if sigma is greater than 1, then pY_t/Y_t decreases in r. If sigma is less than one then pY_t/Y_t increases in r. Let's assume that sigma>1 (the assumption I like). This means that Yb is a stable steady state.

OK so that wasn't very hard, but the problem is that r_t changes as Y_t changes.

I'm working on it (update 3.1 not any more. I realize I was assuming that there was some way to save.

FTC/Blogger Silliness Defined

2009-10-06T13:20:00.000-07:00

Mark Cuban gets the FTC's artificial distinction between bloggers and journalism exactly correct.

Full disclosure: I had a Press Pass to the Clinton Global Initiative, and got things such as a disc copy of Financial Football* and a video ostensibly about the Rwandan National Forests (sadly, not so interesting) as a result.

*It's not my fault Visa describes it as "Financial Soccer" on the U.S. edition of their website.

QOTD: There are Shareholders and then there are Share Holders

2009-10-06T11:44:00.000-07:00

The Epicurean Dealmaker notes that the stock market "game" is irrevocably rigged against the individual investor, and the best thing anyone can do is realise that is so:

I believe [Leo E. Strine Jr, vice chancellor of the Delaware Court of Chancery]'s analysis should conclusively disabuse participants in the current debate over financial regulatory reform of two related notions....The second is the canard that all public shareholders are alike, and they all share the same interests and motivations.

Realizing that the second of these is false, and that Fidelity Investments and SAC Capital do not have the same investment timeframe and objectives as Aunt Millie or even the Ohio Teachers Pension Fund, would have a highly salutary effect on the beliefs and behavior of truly long-term shareholders.

If nothing else, getting Aunt Millie to realize she is the only one in the shark tank without a safety cage should do her a world of good. [emphasis mine]

Read the whole thing, as well as Mr. Strine's piece in the NYT's DealBook that inspired it, for a glimpse of the soft, white underbelly of corporate governance and management.

The Maine Chance

2009-10-06T06:58:00.000-07:00

Robert Waldmann

One strange thing about the health care reform debate is that insurance companies claim to support reform. I have tended to suspect that they are just playing possum.

Now I find positive proof that WellPoint is willing to do what it takes to make sure health care reform passes -- they sued the state of Maine claiming they have a constitutional right to make a profit !?!

In fact they seem to support a public option. It will be a bit hard for Sens Snowe and Collins to explain why they think no public option is needed after this.

I have a challenge. Can anyone think of anything anyone could do which is better for the public option that this ?

What's Your Top Ten List for Tax Reforms?

2009-10-06T06:48:00.000-07:00

by Linda Beale
(cross posted with ataxingmatter)

What's Your Top Ten List for Tax Reforms?

Tax Prof's ongoing discussion of potential tax reforms to be suggested to the Volcker Commission got me thinking what my own "top ten" would be. I'll list them here, but I invite readers to provide their own as well. (Much of my reasoning is expanded in prior posts on most of these issues.)

1. Eliminate CG preference (and in the process repeal 1(h)(11) providing dividend taxation at preferential rates).
You can read my prior posts on this, too, of course. But briefly:

Capital gain preferences are enjoyed primarily by the wealthy, who hold the vast majority of the financial assets. The country has witnessed massively increasing inequalities, with ordinary workers' wages stagnating while top earners salaries and bonuses soar to egregiously overblown heights (especially when one considers that those very earners are often the ones whose speculation was a key factor in the Great Recession). The theory behind capital gains preferences--according to all those pundits, Chicago School economists, and conservative supporters--was that it would free up capital for entrepreneurial investment, creating broad-based economic growth that would benefit everyone with jobs and better standards of living. Well, we tried that experiment for several decades. It simply hasn't worked. What better proof than the Great Recession, which took place after eight years of generous tax cuts for capital?

Given the power of corporations and their managers’ and shareholders’ abilities to use the corporate form to aggrandize and use that power, I do not think that corporate integration is the right answer. Even if we don't eliminate the capital gain preference, we should eliminate section 1(h)(11) preferential treatment of corporate dividends.

2. Tax holdings of marketable securities under 475 mark-to-market accounting

Those who hold lots of stocks and bonds of publicly traded companies currently get to defer their tax until they have some reason to dispose of assets--which may be to recognize a loss that they can use to offset other income. They currently can cheat fairly easily if they want to on the amount of gain reported, since third parties don't track and report their basis. (Academic studies say significant cheating on basis takes place.) If they are lucky (and many are), they will not sell much of their holdings and will pass on the assets at a stepped up basis at death to their heirs, who can then sell tax free. Ordinary workers, however, must pay tax concurrently on receiving their income (and it is even taken out by withholding). This timing favoritism for capital income should end. Mark to market accounting for publicly traded financial assets would be relatively simple and permit third party reporting. (This is something that Mary O'Keeffe and others have recommended before.)

3. Repeal the R&D credit

Much of the basic research that underlies real development is done by universities anyway. Drug companies shouldn't get an R&D credit for adding a tiny change to a patented compound in order to extend a patent beyond its current life, etc.

4. Repeal the special manufacturing deduction section 199

This is easy. This manufacturing deduction is really just a complicating corproate tax giveaway. Set the rates where they should be. No reason for manufacturers (especially as defined in this code section) to get special breaks.

5. Repeal the various subsidies for the natural resources extractive industry

If we want clean energy, we need to direct our incentives towards developing clean energy. Why don't we let the energy department do that with directly funded subsidies--can you imagine the increased citizen involvement and transparency that would result? Get rid of these subsidies in the Code--especially for the dinosaur technologies that are wreaking havoc on our environment, from mountaintop coal removal (and stream destruction) to deep water oil drilling.
6. Phase out the mortgage interest deduction

This subsidy was a part of the housing bubble that was a part of the systemic financial system disruption that cause the Great Recession. It benefits the wealthiest taxpayers the most. It's time to phase it out and quit using the code to support real estate developers and construction companies.

7. Increase rates for estate returns back to 2001 levels (maybe with a $2M exemption).

I've written about this many times before. In an age of growing inequality, the estate tax is one way to tamper down the power and wealth of the superrich. We should let the 2001 law return, at most with a slightly increased exemption amount.

8. Increase the number of rate brackets by at least 2 or three levels, so that CEOs making $700 million pay about 55%

Base broadening is all fine and good, but the fact is that the compensation to those at the top--whether salaries of CEOs making 400 times their average worker (compared to less than 30 times their average worker in the 1970s) or capital income to those with substantial financial assets--is so high that a return to the higher tax rates that existed before the 1986 tax reforms could serve an important stabilizing function. Democracy has trouble existing in a context ripe for oligarchy/plutocracy.

9. Enact partnership reform so private equity/hedge fund managers and others who earn a “profits” interest for services are taxed on that income at ordinary rates

When a service partner gets paid for services and is able to claim capital gains rates (as well as deferral), something is wrong. Let's fix it. Service partners who get profits interests should be treated as receiving only ordinary income distributive shares on those profits interests.

10. Rethink corporate restructurings. Maybe we should enact a continuity of interest provision for reorgs that requires 80% continuing shareholders to qualify for reorg treatment—except for truly divisive spins (ie spins that do not include the acquisition of either controlled or distributing in a related transaction).

This relates to the first point. Given the power of corporations and their managers and shareholders and the systemic risk caused by monster industries (think—investment banks, car manufacturers, oil companies) that are no longer capable of flexibly responding to changed economic contexts, it is possible that the tax code should encourage the development of smaller, more entrepreneurial firms, rather than relying on the “economies of scale” notions that have underlain permitting corporate consolidations on a tax-free basis.

Mid week open thread Oct. 6. 2009

2009-10-06T04:30:00.000-07:00

Public Option...for property insurance

2009-10-06T02:00:00.000-07:00

rdan

Trent Lott demonstrates pretty normal behavior for people who think they are prepared and are not...I guess he did not need to sign a waiver of never regretting not buying public backed insurance. Of course, how that gibes with the rhetoric of no public option and 'taking responsibility' is very human...it tends to change upon need and whim. Of course this will bust the snark-o-meter.
(hat tip reader dani harkin)

David Cay Johnston writes:

Unlike people without health insurance, homeowners have access to public option flood insurance.

Even those who fail to take personal responsibility to buy insurance to protect their property can get benefits, thanks in good part to politicians who are leading opponents of public option healthcare.

Consider the example of Trent Lott of Mississippi, who was that state's senior senator when Hurricane Katrina hit in 2005, flooding his home looking out on the Gulf. Lott had not exercised personal responsibility by taking out flood insurance even though it was available from the federal government at low cost. He did have private insurance, but his insurer refused to pay much of the claim, saying it was not wind damage (which was covered by the policy), but water damage (which was excluded).

Weeks later Lott introduced Senate Bill 1936, which would have authorized retroactive flood insurance. The idea came from Representative Gene Taylor, a Democrat who represented the Mississippi Gulf Coast, which should remind us that when there is voter demand for reform, and campaign contributions are not the driving force, the parties have worked together.

Lott's bill would have let flood victims pay 10 years of flood insurance premiums after-the-fact plus a 5 percent late payment penalty. Since this storm was rated a once in 500 years occurrence, even 10 years of premiums would not come close to covering the real costs, meaning a taxpayer subsidy was built into the Lott bill.

Instead of being laughed at by his fellow Republicans for promoting socialism, the concept of retroactive relief was warmly embraced, although not the idea for retroactive insurance. Instead the government went with handouts.

Senator Thad Cochran, also a Mississippi Republican and at the time chairman of the Senate Appropriations Committee, was key to getting taxpayer benefits for flooded property, according to Taylor's staff. The benefits were issued and expanded twice, a total of about $18 billion in all, Taylor's staff estimated.

Contrast the two Mississippi Republican senators' determined action to get welfare for flooded buildings with their votes against expanding SCHIP health insurance for poor children.

Cochran opposes a public option in health care; Lott, now a lobbyist, says Obama should just declare victory after some minor tweaks, a way to oppose without quite saying so...

Any blue dogs do the same??

Defending Schumpeter from Krugman

2009-10-05T18:03:00.000-07:00

Robert Waldmann

Paul Krugman does not think highly of Austrian or liquidationist theories of the business cycle. He recently remade an argument which is hard to refute "the whole notion falls apart when you ask why, say, a housing boom — which requires shifting resources into housing — doesn’t produce the same kind of unemployment as a housing bust that shifts resources out of housing."

I think the answer is simple -- labor market rents. A bit more after the jump.

Well except not for this recession. I think there is one key additional assumption on which which Schumpeter relied without knowing what he was doing (this is also a case for using models and not just stories). The assumption is that there are labor market rents so the same worker will receive a higher wage in one sector than in another (and it's not a compensating differential).

IN Schumpeter's story, the two sectors are capital goods production and everything else (agriculture, consumption goods production and services). The key assumption that he needs is that workers would really rather work in capital goods production, because they get higher wages there. There is strong empirical evidence that this is true.

In Schumpeter's story as written there is a bubble with over-investment, the build up of an excessive capital stock then a recession with low investment until the aggregate capital labor ratio is brought back down due to depreciation, population growth (Solow might add exogenous labor augmenting technological progress).

Your question is "Why is prolonged unemployment required to move someone from capital goods production to other and not vice versa ?" My answer is that workers in other sectors are eager to get high wage jobs producing capital goods so there is always, no matter what, at any unemployment rate a queue of workers in line for those jobs. Thus the minimum unemployment rate ever seen is plenty to support any flow into capital goods production.

However, to get people to flow the other way takes a huge push -- high unemployment. I'm pretty sure I can write down a model that works in an hour. Note I said write down not type up.

Clock starts 9:00 pm EST October 6 2009.

update:Now 9:51 pm EST October 6 2009. I haven't been watching the clock. I claim that I have a model written down. It is not solved (no closed form solution for numerical solution).

update 2: In the cold grey light of morning, my 1 hour model looks pretty dumb. I have modified it so it isn't totally dumb and might actually simulate it numerically. However I did run a bit over the hour as it is now 2:14 AM EST. I did sleep most of that time.

Good Policy from the Bush administration

2009-10-05T16:39:00.000-07:00

Robert Waldmann

OK now that I have your attention, the policy is publicly funded primary care in public clinics staffed by federal employees (including the MDs). This is an excellent policy which provides care for the uninsured and reduces health care spending, because then they don't have to go to emergency rooms then declare bankruptcy. So says the notoriously lefty Wall Street Journal (news pages but still the WSJ)
via Atrios of course.

Details and explanation of why this makes me praise Bush II after the jump.

Click the link for a serious description. I want to cut and past a patient testimonial

O'Delia Mandrell, 57 years old, said she got "pretty desperate" last year and went to the center for the first time. The former Navy reservist won't receive full health benefits until she turns 60, and said she had to quit working other jobs because of a virus that has weakened her body. Doctors think it may be Lyme disease.

"They haven't charged me a dime and really work with me 100%," she said.

Warning, your milage may differ. Typically there are fees on a sliding scale based on income starting at $20 a visit.

Now how much does this cheap care cost the country ?

A new report by researchers at George Washington University estimated that additional funding for centers in the House bill would save the health-care system $212 billion to $251 billion over the next decade, in part by reducing the number of visits to hospitals and more highly paid private doctors.

One of the toughest information gathering challenges I have ever faced was the challenge to find a good Bush administration policy initiative. The fact that the challenge came from Andrei Shleifer, who is uhm not a lefty, made it especially interesting. So now I read

"Former President George W. Bush doubled financing for the centers, bringing their number to 1,200 nationwide."

Another example would be HUD adopting "housing first," that is not so tough love for the homeless based on the idea that the homeless would be better off if we just gave them apartments (even if they are still abusing substances).

The point is that public assistance in the USA is so insanely stingy and punitive that even the Bush administration made major progress here and there by reducing the stinginess and punitiveness.

Chinese Yuan

2009-10-05T10:19:00.000-07:00

By Spencer,

Reading the financial press, various economic blogs and watching CNBC clearly leaves the impression that the current weakness in the dollar is having such a massive adverse impact on the holding of the Peoples Bank of China ( the Chinese central bank) that they are very seriously considering selling their dollar holdings and shifting into alternative reserve assets.

Given all that I've been reading and hearing I thought it would be informative for people to see what is actually happening to the Yuan-Dollar exchange rate.

That's right. The Yuan is pegged to the dollar and has not changed one cent this year. Because the dollar has weakened this means that the yuan has weakened against the Euro and Yen, but the change is not out of line with other swings over the past decade. This means that Chinese exports have become more competitive in Japan and Europe, a highly desirable result from the
perspective of the Peoples Bank of China..

Actually, given the rally in the US bond market so far this year the Peoples Bank of China has actually experienced a very significant increase in the value of its holdings of US financial assets so far this year.

Makes one wonder about the value of so much of the information provided by the press, CNBC and economic blogs.

Adam Smith's Lost Legacy

2009-10-05T06:40:00.000-07:00

rdan

Adam Smith's Lost Legacy, a blog maintained by Gavin Kennedy who resides in Edinburgh, Scotland, is a wonderful gem to visit to take a thorough look at the broad extent of Smith's writings. He makes a wonderful defense of Adam Smith that rescues his reputation as a thinking man instead of the one dimensional character presented today. Is Adam Smith from Chicago or Kirkcaldy?

We lose something of our character if we do not get his name off bumpersticker style proclamations of his intellect demonstrated by the two soundbites attached to his name: one, reduced simply to a fetish about an 'invisible hand' in markets by some of his promoters in media (or even detractors), and two even as he is taught in textbooks to college freshmen by good teachers. Lively conversation will happen I hope.

With kind permission from Mr. Kennedy, I will cross post some of his posts this week.

Update: David Leonhardt writes a cogent piece in the New York Times on Adam Smith.

The Fed called a mulligan

2009-10-04T09:00:00.000-07:00

by Rebecca

Ex post, it is obvious that the Fed was way too tight in the second half of 2008. To be sure, the FOMC was actively engaged in its standard easing policies; however, the Fed got the Treasury to aid in its sterilization efforts, and later the Fed fast-tracked the interest on reserves (IOR) program (originally set for an Octo ber 1, 2011 start). The Fed was misguided in its sterilization efforts, as aggregate demand was already collapsing.

Something was afoot well before the collapse of Lehman Brothers. David Beckworth at Macro and Other Market Musings backs up Scott Sumner's (TheMoneyIllusion blog) theories with an intuitive analysis using the equation of exchange (MV = PY):

Below is a table with the results in annualized values (Click to enlarge):

This table confirms what we saw in the levels: a sharp decline in velocity appears to be the main contributor to the collapse in nominal spending in late 2008 and early 2009 as changes in the monetary base and the money multiplier largely offset each other.

... (And a little later)

Unfortunately, though, it appears the Fed was so focused on preventing its credit easing program from destabilizing the money supply that it overlooked, or least underestimated, developments with real money demand (i.e. velocity). As a consequence, nominal spending crashed.

This line research essentially posits that the Fed got it terribly wrong in the second half of 2008. As David shows in the table above, the velocity of money was dropping with households clinging to cash under heightened economic uncertainty.

If this theory is true, then one could view the $300 billion Treasury buyback program (see the NY Fed's Q&A here) as the Fed's equivalent of "calling a mulligan" in an attempt to take back its sterilization efforts in 2008.

The $300 billion buyback of Treasuries will restock about 75% of the Fed's Treasury holdings (focused in notes and bonds rather than bills, but there is a contemporaneous objective to pull long rates down) that dwindled previous to the onset of the SFP account. Unfortunately, though, it was already too late.

(The Treasury issued short-term notes and deposited the proceeds with the Fed in order to aid in the Fed's sterilization efforts - see an old post of mine for a more thorough explanation of the SFP, or the Supplementary Financing Program.)

Another event recently occurred that would support the view that the FOMC is backpedaling: the Treasury's Supplementary Financing Program (SFP) is going bye bye.

The Treasury started this week to unwind its account with the Fed (the SFP listed on the liabilities side of the Fed balance sheet). This is almost surely going to end up as excess reserve balances in the banking institution, as the Fed is unlikely to sterilize these flows. (Note that one could see if the Fed was sterilizing the flows if its Treasury holdings started to fall again.)

I guess that the real question is: where would we be now if the Fed had pushed harder on the money supply in 2008? I imagine that Angry Bear readers have many thoughts on this.

Rebecca Wilder

Social Security: An Update

2009-10-04T08:25:00.000-07:00

by Bruce Webb

If you click on the Social Security link in the upper left sidebar you are sent to an index page on my website which in turn links back to an extended series of posts here at Angry Bear starting in May of 2008. Something that apparently a reader did this morning leaving the following comment:

Larry said...
I'd greatly appreciate an update, given the latest revenue numbers, which show outlays exceeding income at least for the time being.

Well I left an extended reply there but thought I would supplement it with a brief version here. (Well it didn't turn out brief, sorry.)

It is quite possible that 2009 and 2010 will see Social Security go cash flow negative in that they will take in a little less in cash via payroll tax and tax on benefits than they will pay out in benefits. Whether this is a problem or not depends on your views about the Social Security Trust Fund. Legally Social Security has roughly $2.5 trillion dollars in assets which in turn represent about 20% of total U.S. Public Debt. Under the law Social Security is on an equal standing with all other creditors who have lent money to the U.S. and expect to get it back based on Full Faith and Credit of the United States. Now there are some valid questions about whether the U.S. can sustain a Public Debt load that is as of last Friday $11,920,519,164,319.42 and projected to grow at $1 trillion a year for the next 10 years. On the other hand people who are using legalisms to tell you that somehow the $2.5 trillion of that $11.9 trillion that is owed to current workers and retirees is in a junior debt position to the $800.5 billion owed to China are blowing smoke. Legally, morally and even more important electorally the claims of American workers and retirees are if anything better than those of the Chinese Central Bank.

There are people who will make earnest claims that one branch of government cannot owe money to another branch. There is no legal basis for that claim, it is a simple exercise in logical hair splitting. The reality is this. A major part of total American income has been tapped to pay out retirement benefits to workers and to build up a reserve to continue those pay outs for future retirees. The excess dollars have been borrowed on behalf of all Americans including those who gain their income from sources not exposed to this particular source of taxation. Those people, whose incomes range from the lower six to the upper eight digits, by and large don't want to pay those dollars back and have hired people to manufacture reasons to convince people making five digit incomes or less that America as a whole simply can't afford to pay that money back and that the lower 95% or so of Americans just have to lump it and accept that as a lost cost. Well we don't have to lump it and have at our disposal democratic means that ensure that the the six to eight digit people pay back their fair share of the money that we all borrowed. Unless of course we fall for the spin being presented by the paid spinners at the Concord Coalition, Cato, and American Enterprise Institute. (And those were not chosen at random, they are the collective headquarters of the War on Social Security).

So my answer to Larry is: We have $2.5 trillion dollars backed by the Full Faith and Credit of the United States in the Social Security Trust Funds. Those dollars are currently earning around $110 billion in interest this year which is more than enough to cover what may be a $5 billion or so shortfall in tax income this year and potentially more next. Social Security is still running large surpluses and Trust Fund balances will continue to increase until around 2022 and then start shrinking until they fall under a 100% reserve around 2026 en route to running out totally by 2037. If we want to maintain full scheduled benefits after 2037 we need to make minor changes in revenue either starting immediately or when Social Security falls out of Short Term Actuarial Balance (which the Trustees define as not having a 100% reserve in each of the next 10 years). But unless you simply discount that $2.5 trillion dollar balance and the interest it earns to zero a cash flow shortfall representing less than 1% of total outlays for Social Security is absolutely nothing to worry about. And those who earnestly tell you different are liars, thieves or people deceived by the liars and thieves.

(BTW some of the liars are some of the nicest people you will meet. Just as people who are paid to represent rapists and murderers may be nice people in person. That doesn't mean that their goals are benign. So feel free to substitute 'paid advocate' for 'liar' if you like, it doesn't change the substance.)

Why Canada and Mexico are Different (It's Not Just Toque versus Sombrero)

2009-10-04T07:15:00.000-07:00

Canadians feel intuitively that trade restrictions between the US and Canada are different from those between the US and Mexico and other low-wage nations. It's not just that Canadians want to protect their own interests, though of course we do. Perhaps this paper can expand the discussion.

From "International trade, offshoring, and US wages", Avraham Ebenstein Ann Harrison Margaret McMillan Shannon Phillips, 31 August 2009

"...We then ask whether falling manufacturing employment and rising wage inequality are related to trends in offshoring activities and international trade. One measure of the increase in offshoring activities for US companies is the number of workers employed “offshore” by US multinationals (firms which account for most of US manufacturing employment). Figure 3 shows that the number of workers employed by US multinationals in low-income countries nearly doubled over the last 25 years, while such employment in high-income countries remained roughly constant. One implication is that any employment costs at home of offshoring activities abroad are likely to be concentrated in low-income countries (a result our research confirms)..."

"...Policies (such as those proposed by the Obama administration) designed to curb the negative effects of offshoring on US jobs need to distinguish between offshoring to rich and poor countries. Since the negative effects are restricted to lowincome destinations, any policies which discourage offshoring in high-income regions (such as Ireland or France) will have the unintended effect of hurting the very workers they are designed to protect..."

TARP, Yet Again: Inflationary?

2009-10-03T18:04:00.000-07:00

Back in the old days of derivatives (the mid-1980s), there was an international commercial bank that was famous for declaring how much good derivatives had done for it.

It was famous because it was common knowledge in the marketplace that the bank would have its swap counterparties "buy out" the positions where it was due money, while those on which it had a debit debit were kept on its books.

So I wasn't exactly either surprised or believing when the NYT announced, to much fanfare, that there was a "profit" being made on the bailout funds. As Bruce Webb noted here at the time:

These early returns are by no means a full accounting of the huge financial rescue undertaken by the federal government last year to stabilize teetering banks and other companies.

The government still faces potentially huge long-term losses from its bailouts of the insurance giant American International Group, the mortgage finance companies Fannie Mae and Freddie Mac, and the automakers General Motors and Chrysler. The Treasury Department could also take a hit from its guarantees on billions of dollars of toxic mortgages.

But it got nice headlines at the end of August, when talk of "green shoots" and "inflation fears"needed to get momentum.

Featured less prominently is a now-week-old LAT article with a more realistic perspective:

The Treasury is unlikely to get back the full amount of money lent under the Troubled Asset Relief Program despite a recent spate of repayments from large banks, warned the program's watchdog.

The program "played a significant role" in rescuing the financial system from a meltdown, Neil Barofsky, special inspector general for TARP, testified before the Senate Banking Committee on Thursday. But it was "extremely unlikely that the taxpayer will see a full return on its TARP investment," according to his prepared testimony.

The official story remains that the large banks will be paying everything back. If that's true, then the answer to Rebecca's question of how to drain liquidity from the financial system is clear: take the paybacks and disappear the monies. It's only if there is an excess shortfall on the securities that excess money will be in the system.

So, if the NYT was correct at the end of August, or the cheerleaders are correct now, there will not be an inflation issue, or an excess bubble, just a little "extra lubricant" making certain that valuable securities attain their full value that will naturally be removed from the system (both as cash and as Lines of Credit) as the value is realized.

Indeed, the only reason to fear inflation from TARP/TAF sources is if you expect a significant shortfall in the actual values, something for which you can only compensate by leaving a large quantity of excess lendings in the market. Which, by definition, will not and cannot happen if all the major players repay their allocations in full (let alone with interest).

Second derivatives don't make inflation. And money loaned by the Fed that is fully repaid doesn't make inflation unless it is loaned out ("multiplier effect"), which hasn't been and still isn't happening.

What there is is "excess" cash sitting on bank balance sheets in lieu of full repayments. But it's not being used for other things—no multiplier effect—and it can be disappeared by the Fed as it is paid back.

So where is the inflation, unless money has been added to the system without there being value behind it?

Somewhere, an old derivatives manager is watching. Maybe he recognizes his strategy in the story unfolding. Maybe, just maybe, he also kept underlying deals that didn't have losses as big as the gains he took.

It's possible. But it was never the way to bet.

Brad DeLong is Correct

2009-10-03T13:28:00.000-07:00

All right, I give up. I've reviewed for the Washington Post Book World, I consider some of their work interesting, and can almost forgive them for publishing Ruth Marcus, Charles Krauthammer, Anne Applebaum, and Richard Cohen as if they were sane.

But when your Ombudsman claims that your readers "typically demand coverage that is unfailingly neutral," and cites as an example of "crossing the line" one of your reporters making a statement of fact:

"We can incur all sorts of federal deficits for wars and what not," Raju Narisetti wrote on his Twitter feed. "But we have to promise not to increase it by $1 for healthcare reform? Sad."

There is no purpose for your organization to even claim it publishes news.

Open thread Oct. 3, 2009 (with GW)

2009-10-03T05:14:00.000-07:00

Draining liquidity from the banking system

2009-10-03T02:55:00.000-07:00

by Rebecca
(cross posted at Newsneconomics)

Prof. Jim Hamilton at Econbrowser (thanks Mark Thoma for the link) addresses one of the Fed’s standard methods of draining liquidity from the banking system: reverse repurchase agreements. Basically, the Fed will transfer some of its assets to the banking system via short-term loans taken out with its Primary Dealers, presumably offering standard (Treasuries) and less standard (MBS or agency bonds) assets as collateral.

Reverse repurchase agreements simply slosh around the assets (MBS, agencies, and Treasuries) between the Fed and the Primary Dealers, rather than removing the assets from the Fed’s balance sheet permanently. Eventually, though, the Fed must sell the securities outright onto the open market – we are far, far from that!

This is all hot air for now. How can the Fed soak up the expansionary liquidity, let alone unwind $1 trillion in assets, when the banking system is still shedding pounds?

The Fed is considering another route, too: conducting the same repurchase agreements with the money-market mutual fund industry in tandem. An excerpt from the FT:

The Federal Reserve is looking to team up with the money-market mutual fund industry as part of its strategy to ensure that its unconventional policies to stimulate the economy do not produce a bout of post-crisis inflation.

The central bank envisages eventually draining liquidity from the financial system by engaging in trades called “reverse repos” with the deep-pocketed money-market funds. In these, the Fed would pledge mortgage-backed securities and Treasuries acquired during the crisis as collateral for short-term loans from the funds.

The obvious counterparties for reverse repo deals are the Wall Street primary dealers. However, the Fed thinks they would only have balance sheet capacity to refinance about $100bn of assets. By contrast, the money-market funds have $2,500bn in assets, which means they could plausibly refinance as much as $500bn in Fed assets. Officials think there would be appetite on the part of the funds, which are under pressure from regulators and investors to stick to low-risk liquid investments.

The Fed is solely attempting to assuage inflation angst at this time; it’s still very premature to talk about an exit of expansionary policies when credit markets still crimp the stimulus that the Fed so desperately wants to get into the open market (much of the base, roughly $855 billion on September 23, 2009 and up from $2 billion in August 2008, remains on balance with the Fed in the form of “excess reserves). Just look at the crunch in the consumer credit space (chart to left).

As Prof. Hamilton suggests, the mechanisms of the reverse repos should successfully sterilize the base before it starts to become inflationary (with either the Primary Dealers and/or the Mutual Funds industry). However, one of the programs through which the Fed utilized previously to sterilize its liquidity, and to which Prof. Hamilton refers, – the Supplementary Financing Program – is unlikely to be an avenue for removing liquidity.

In fact, it’s quite the opposite. The Treasury already announced its imminent plan to liquidate the bulk of its $200 billion account with the Fed. There’s another $200 billion in excess reserves with which the Fed must contend (see my previous post here).

It’s easy to get the liquidity into the financial system. But getting it out without collapsing the economy or allowing inflation pressures to build? Well, that’s a different story.

Open thread Oct. 2, 2009 (no GW)

2009-10-02T20:14:00.000-07:00

Employment Report

2009-10-02T07:09:00.000-07:00

By Spencer

Not only was the employment report disappointing, but previously reported encouraging leading indicators of employment were revised away.

Most importantly, hours worked fell 0.5% from 99.0 to 98.5. We are now looking at a 3.0% drop in hours worked in the third quarter as compared to 7.8%,8.9% and 7.4% in the prior three quarters, respectively. If the consensus expectation of around 3% real GDP growth in the third quarter materialize this means that third quarter productivity growth will be very, very strong.

Previously it had appeared that hours worked were bottoming in the third quarter. Now we are ending the quarter on a weak note that establishes a poor base for fourth quarter growth.

In addition, employment growth in the household survey no longer appears to be bottoming. Usually the household survey leads the payroll survey at bottoms and the latest data does not look encouraging. Even the apparent bottoming in the decline in payroll employment stems more from the point that the employment drop was more severe a years ago, not that the current data is improving.

Finally, average hourly earnings were virtually unchanged as they rose from $18.66 to $18.67.
With the drop in the hours worked this means that nominal weekly wages actually fell and the year over year gain fell to 0.7%. Consequently, the growth in nominal personal income is likely to remain negative. Something that has not happened since the depression.

Obliviously Offending the World, Teabag Edition

2009-10-02T04:38:00.000-07:00

by Noni Mausa

From the NEWS.com.au Australian :
news service

Tea Party Obama 'witchdoctor' slur offends PNG October 01, 2009 02:46pm

PAPUA New Guinea tribesmen have demanded an apology from American political satirists who used their traditional dress in a witchdoctor slur against US President Barack Obama.

In the offending image, a headshot of Mr Obama was superimposed on a photograph of a PNG Highlands region man in full traditional costume, supposedly to portray the black President as an African witchdoctor.

Damien Arabagali, Hela Gimbu Association chairman, said PNG's Foreign Affairs Minister and Cultural Minister would have to take up their demand.

[...]

HGA lawyer Alfred Kaibe, who wore his traditional Hela costume when sitting as a member of Parliament in 2001, said his people did not see the funny side.

"It borders on racism, to us and the US President," he said. "The connotation is this type of dress is for witchcraft...This is our traditional costume; we are proud of it."

Another HGA member suggested that if no apology was forthcoming the $16 billion ExxonMobil liquefied natural gas project based in the region could be jeopardised...

Well, maybe not. But maybe.

Good prospects of reopening Bougainville copper mine.
There are 'positive prospects' for reopening the Panguna copper mine in Papua New Guinea's Autonomous Bougainville province, with local landowners planning a major reconciliation. The mine was closed nearly 20 years ago during a secessionist conflict led by the late Francis Ona, which was sparked by landowner issues and environmental damage caused by the mine...
...The Bougainville conflict that broke out in 1989, when rebels under the leadership of the late secessionist, Francis Ona, attacked the mine workers and installations over environmental pollution they alleged the mine was causing.

The mine was abandoned, and thousands of Bougainvilleans died in the subsequent civil war before a peace accord was reached in 2001.

Words and images have power, and not just in the intended direction . It doesn't seem likely that the offensive images fostered by the American tea partiers will have force enough to reach around the world and effect the business dealings of ExxonMobil...

But they might.

The form of health insurance matters

2009-10-02T02:07:00.000-07:00

by Linda Beale

Linda Beale writes at ataxingmatter:

Health Care Reform or a boondoggle for private insurers?

The Baucus proposal for health care "reform" doesn't include a public option. And the Senate Finance Committee voted this afternoon-by 15 to 8--to reject the Rockefeller proposal to add a public option "community choice health plan'. See Hershenson, Senate Panel Rejects Pair of Public Options in Health Plan, NY Times, Sept. 29, 2009.

Kent Conrad, Bill Nelson, Blanche Lincoln, Thomas Carper--those are purported Democrats who voted against Rockefeller's public option. Conrad and Lincoln voted against both versions put forward today. They need to think about whom they are serving, because it isn't the ordinary people of this country. Sure, the Republicans are going to claim that any public option is "socialized medicine". So what? Those naysayers want to preserve the status quo system of high prices and low coverage that allows the health industry to reap "rent" profits no matter what the effect on the vast majority of ordinary citizens. Democrats are supposed to stand for something different--for using government in the service of the people. They should be out on the stump, explaining to people why public provision of education (public schools, public universities), medicine (medicare, medicaid, and a new public option here), and fire and police protection are not issues of "socialism vs capitalism" but of workable regimes that serve the people versus nonworkable regimes that permit a very few, very large corporate players (and their managers and owners) to hold a near-monopoly over services that ought to be available to everyone at a reasonable price: this is so because we are a democratic society that believes in government working for the good of all and not just for the good of the wealthy.

I simply don't buy the excuses. Republicans and Democrats voted for irresponsible tax cuts under Bush and for irresponsible deregulation of financial institutions under Clinton and Bush. We have the awful result of an economy that serves the wealthy now much better than it serves ordinary Americans, at a cost that will be borne by ordinary Americans in terms of lost job opportunities, lower standard of living, and declines in health care coverage. I am becoming convinced that this Congress is too beholden to private money to make long-term decisions to benefit the public--whether on climate change or health care reform.

So where do we go now? The House needs to stand firm for the public option, and perhaps the Senate itself, not the Finance Committee, will see the light. We cannot simply mandate coverage--providing a huge boon to private insurers in terms of getting a new captive audience of insureds paying premiums--without also providing a public option that will allow us to move someday, if it proves to work better than private insurance, to a medicare-like system for all.

Health Care Harder Ball: You read it here first

2009-10-01T12:57:00.000-07:00

Robert Waldmann

Angry Bear September 04 2009

Tell reluctant senators and representatives that, if they think their constituents don't want any public insurance except for medicare and medicaid, then they can refuse to have it.

Ezra Klein and Senator Maria Cantwell October 1 2009

EK Can they opt out?

MC States can opt out.

Senator Tom Carper too October 1 2009

Tom Carper's proposal is more interesting. It's gone through a couple twists in the past 24 hours (including the addition, and then welcome removal, of a trigger), but in its current form, each state would have the option to:

1) Participate as grantees in the CO-OP program and apply for seed funding.

2) Open up that state’s employee benefits plan.

3) Create a state administered health insurance plan with the option of banding together with other states to create a regional insurance compact.

Each state would, in other words, be allowed to create a public option

Vanilla

2009-10-01T12:33:00.000-07:00

Robert Waldmann

A proposed reform (already shelved) is to require banks to offer "plain vanilla" products. I am very confused about this proposal, so this is a semi bleg. I can't see any possible benefit from the regulation (probably because I haven't read the fine print of the draft bill).

~~My thoughts after the jump.~~

Bottom line -- a vanilla option must include the rule that at least x% of a bank's business must be vanilla or they pay a fine to work.

Also, I propose calling non vanilla products "fudge swirl" products unless anyone has ever scene "fudge twist" or "fudge spin" ice cream.

update: Jump corrected so most of my post is after it.
Also see Waldman vs Waldmann after the jump.

I will criticize a proposal which might exist only in my imagination. A very silly vanilla rule that just says banks must offer a plain vanilla product -- say a 30 year fixed rate mortgage. [Here is an] explanation by [Steve Waldman at] Interfluidity via rortybomb:

Vanilla products would turn basic financial services into a commodity business, and force providers to compete on price…. Since vanilla financial products would be commodities, banks would have to universally collude to offer them at inflated prices in order to bilk consumers. Competing vanilla project offerings would (at least they should) vary only on a single dimension (e.g. an interest rate). Points, fees, penalties, etc. would be homogeneous or uniformly pegged to the core price.

This argument does not apply to a simple requirement that banks offer vanilla products. Forcing them to offer the product does not force them to compete to sell the product.

Consider the case in which all banks offer fixed interest 30 year mortgages at 100% interest per year. Technically they have fulfilled the silly vanilla requirement. There is no improvement in anything as offering a fixed rate mortgage at 100% is just like not offering a fixed rate mortgage.

So, in the absense of collusion, is this alleged equilibrium vulnerable to deviation by a firm which offers a reasonably priced fixed rate mortgage ? It might or might not be. If it isn't then the silly vanilla rule will not be effective. If it is, then the silly vanilla rule is not needed and will make no difference.

Since offering fixed rate mortgages at 100% is just like not offering them, the equilibrium profits and profits to deviators are just the same as in the case in which there are no vanilla products and one bank can deviate by introducing one.

If compliance with the regulation implies no real change at all, then a bad equilibrium with technical compliance will be identical to a bad equilibrium with no regulation, one is a Nash equilibrium if and only if the other is and payoffs to all agents are just the same.

So "forced to compete" only makes sense if the vanilla rule is not the silly vanilla rule. It makes sense if there is a requirement that say at least 10% of a bank's mortgage lending must be fixed rate 30 year. Then banks will compete to issue fixed rate mortgages even if they are not as profitable as option ARMs etc , because by loaning a dollar at a fixed rate for 30 years they win the valuable right to loan 9 dollars as option arms.

I have no idea if the proposed now shelved rule was the silly vanilla rule (hence the bleg)

Steve Waldman to me
show details 5:23 AM (15 hours ago)

Robert,

I tried to add this as a comment to your Angry Bear post, but alas, I am too logorrheic. The post was rejected, and I am too lazy to edit.

So I offer it to you, fwiw...

smiles,
Steve

---

Robert -- I hesitate to disagree with you, because you have that extra 'n' that gives you superpowers of which I can only dream.

But you are wrong, right here:

"Since offering fixed rate mortgages at 100% is just like not offering them, the equilibrium profits and profits to deviators are just the same as in the case in which there are no vanilla products and one bank can deviate by introducing one."

This would be true if consumers had perfect information and could distinguish safe from unsafe products, vanilla from fudge swirl. But in a world where all financial products that banks offer are opaque to most consumers, and where therefore consumers attach an uncertainty cost based primarily on offering institution, no bank has an incentive to deviate with a less profitable vanilla product. Suppose a 30-year "fudge swirl" mortgage creates higher revenues in expectation (and higher costs to consumers) than a 30-year vanilla. But consumers cannot distinguish fudge swirl from vanilla. Then offering only fudge swirl is the dominant strategy for banks. Offering vanilla involves fixed costs of product development, and consumers that choose vanilla are just an opportunity cost viz fudge swirl.

Now suppose a trusted external party, call it "the government" certifies some products as vanilla. (There is no other party that could credible on this given the incentives to game certifications, and even the government might be too compromised.) Now consumers can distinguish between vanilla and fudge swirl, and deviating involves benefits as well as costs. Offering a non-100% 30 yr vanilla will capture some extra consumers, who know it is that good clean flavor they like, leading to extra revenues, while it will also cannibalize some existing, more profitable nonvanilla prospects. Under this circumstance, there should be deviation, as the sole provider of vanilla (under reasonable assumptions) would gain much more by taking other firms' prospects than they'd lose downselling their own client base.

This argument suggests that there's no reason to require any bank to offer vanilla, just a requirement to have the government certify some products as vanilla. And I think that's mostly right, although I support a requirement for the sake of timing, because it can take a while for existing well-policed cartels to collapse despite a favorable Nash equilibrium. That is, if CFPA simply defined a schedule of vanilla financial products and offered to certify compliant offerings, the larger banks would "as a matter of principle" refuse to participate, and many smaller banks as well by virtue of industry/ABA pressure. The industry would also lobby for very elaborate certification requirements for vanilla products, and that banks should pay their own certification costs, to create a barriers that would help to discourage smaller deviators. Still, if the certification barriers aren't too outlandish, some small and midsize banks would deviate. Since financial product markets are segmented (there are many customers who for arguably misguidedly perceive larger providers as safer or more reliable), big banks wouldn't be under very much pressure to follow suit and compete. Eventually, again if certifiation costs aren't outlandish, the cartel would break, and fundamentally, mere credible certification of vanillahood would be sufficient over the long run. But over the long run we're dead. I support vanilla as a requirement because I want to see informationally-protected financial services rents collapse quickly, not "at equilibrium".

Note that the market that would be least affected by vanilla products is mortgages, because a de-facto vanilla standard already exists -- GSE requirements for prime mortgages. Here we can see that...

1) vanilla is not a panacea -- there has long existed a widely known vanilla product, yet banks often persuaded prime-eligible consumers to accept products with much higher expected costs by offering attractive features like teaser rates and negative amortizations. People can still choose belly-ache when vanilla is on offer, and they will.

2) vanilla is not useless. Many homebuyers, understanding that mortgages are a complex game they are ill-equipped to play, forgo lower down- and monthly payments to stick with "traditional prime" mortgages. Vanilla has worked exactly as it is supposed to for this population: homebuyers can shop around for a prime mortgage based on fees, perceived service, convenience, etc, and the market is competitive. Not all providers are the same, of course, but people are rarely screwed by surprising characteristics of the product. Lots of primes are defaulting of course, but they are doing so for reasons they would have understood well ex ante: they can't make the monthly payment, even though it is the same payment they signed up to and paid their first month. They are not being screwed by prepayment penalties, resets, recasts, interest-rate spikes, etc. That primes are suffering in the quantity that they are is arguably a function of the popularity of nonprime products, which permitted higher effective leverage and therefore helped inflate a housing market primes had to compete in. (If all homebuyers had to put 20% down per supervanilla prime, there would have been no housing bubble.)

Anyway, my understand is that the vanilla rule would have been what you are calling the "silly vanilla rule". But you are wrong to do so. Such a rule would not be silly at all.

PEW Trust summary report on regulatory models

2009-10-01T07:09:00.000-07:00

rdan

The PEW economic policy department task force report suggests we take a better look at other models of regulation, perhaps to Australia.

In this short paper we look at the structure of international financial regulation in teh context of their response to the crisis in order to see what lessons there may be for the US. This is a summary not a detailed research effort, but we believe that even a summary effort could be helpful in order to dispel the idea that the experience of other countries makes it a waste of time to attempt substantial consolidation of regulatory agencies in the US.

The most important factor in determining the response of the different systems to the crisis is whether or not regulators were actively involved in making sure that their institutions, especially large institutions, were not taking excessive risks and speculating in risky assets. The particular designs of the regulatory systems do not show a clear enough pattern to make a definitive case for one specific approach. However, all of the countries described here undertook programs of regulatory consolidation in recent years in response to the changing nature of their financial sectors. Having a fragmented regulatory system did not strike any country as a particularly good idea...

As the G-20 makes announcements and the WTO actually makes rules with teeth, we shall see how this plays out on the global front as well, where the big action also takes place.

OCC non-regulation keeps momentum going for Citi bank

2009-10-01T06:53:00.000-07:00

rdan

Seeking Alpha's Matthew Goldstein notes that the OCC is continuing the last decade of regulatory non-action.

The OCC, in its quarterly derivatives report, routinely notes that the Big Four “have the resources needed to be able to operate this business in a safe and sound manner.”

In other words, the biggest banks are best suited to handle all these derivatives contracts because they’ve been doing it for so long.

But it’s this regulatory logic that has helped enshrine the too-big-to-fail doctrine. A handful of financial institutions are deemed more indispensable than others because they are too interconnected to fail. It’s the large concentration of derivative contracts at a troubled bank like Citigroup that made a big bailout necessary.

So it’s particularly disturbing to find that the total dollar value of outstanding derivatives at Citi rose by $2.3 trillion, to $31.9 trillion in the second quarter. By contrast, the notional value of derivatives transactions at JPMorgan Chase — the leader in this category — fell by $1.2 trillion, to $79.9 trillion.

It’s hard to fathom how a bank that has yet to prove it can stand on its own two feet without huge amounts of federal support should be adding to its potential derivatives exposure.

The OCC report is here with accompanying charts. Notice John [Bloody Effing] Dugan still heads the agency. [edited, links added -- klh]

Incentives for Rating Agencies

2009-09-29T18:57:00.000-07:00

Robert Waldmann

It would be easy to pass a law that issuers of securities aren't allowed to pay ratings agencies. One problem is that if purchasers of securities paid for ratings, the ratings would have to be their secret at least for a while. One might add a provision that ratings be made public after x days for some x.

I don't think this solves the incentive problem at all. Briefly, I think ratings agencies can decide if a class of financial instruments exists or not and, whoever pays them, have an incentive to make sure it exists by being generous to innovative financial products.

I do think an incentive scheme which would work is almost possible. I'd say no new regulations for old standard instruments like corporate bonds. For rating a not so traditional instrument ratings agencies can be paid only the salary of people who do nothing but rate that instrument plus 20% for overhead.

Now such rules haven't worked very well for government contractors, but I think that's the best that can be done.

Obviously this proposal is politically impossible. Aside from financiers and the ratings agencies disinterested observers who consider financial innovation to be socially useful will think it's a terrible idea.

I respond "OK OK plus 30% for overhead."

Texas is Not in a Recession, but it's Bottoming Out

2009-09-29T05:53:00.000-07:00

Rick Perry famously declared that there was no recession in Texas, even though the only way they balanced the budget was through emergency funding.

Rick Perry and the Federal Reserve Bank of Dallas appear not to talk with each other:

Texas factory activity showed the first signs of bottoming out in September, according to the business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key indicator of current manufacturing activity, came in close to zero as the number of companies seeing increases and decreases was nearly equal....

Employment indicators suggest manufacturers are still trimming payrolls, but the key indexes are becoming less negative. The average work week index rose for the second consecutive month, and about 17 percent of manufacturers noted increases in work hours. The employment index also improved as
the share of firms reporting job cuts fell
, while those reporting new hires rose from last month. Wage pressures remained minimal, with 92 percent of producers noting no change in compensation.

Yep. Just what we expect to see in a "normal" economy.

How malpractice drives health care costs

2009-09-29T02:03:00.000-07:00

by Tom aka Rusty Rustbelt

How malpractice drives health care costs.

This is a bullet point narrative, representing a long time line, but illustrates what happens to drive health care costs:

Emergency physicians use x-rays to diagnose closed-head injuries and miss brain bleeds.
The hospital and physicians are threatened or sued for malpractice.
Word circulates about these cases (physicians, administrators, lawyers).
CT scan technology is improving and is more available.
In response, ED physicians use more CT scans on closed head injuries.
Benchmarking studies** indicate CT scans are best practices for closed head injuries.
ED physicians use CT scans on more closed head injuries. Etc.
This is how malpractice drives health care costs, even though there are relatively few suits on this specific issue.

** These sorts of studies will be integral to comparative effective programs, added to academic medicine research.
______________________________________
Tom aka Rusty Rustbelt

PS. I am going to be on the road for about ten days next month talking to health care providers about reform, and hope to come home with some insider information (politicians and lawyers and etc. tend to show up at these meetings).

Rdan here: The only item I would add is that the addition of expensive equipment is easier than maintaining patient volume for the equipment (ROI). Such additions were originally seen as revenue enhancers, which turned out to be less than accurate for many practices, or sometimes resulted in efforts to simply push an increase in referrals that insurance paid for, which is seen as safe practice.

Darwin Strauss and Popper

2009-09-28T17:06:00.000-07:00

Robert Waldmann

Neoconservatives have expressed sympathy for "intelligent design theory," that is, creationism. This is well documented by Ronald Bailey's article in "Reason on line." Bailey discusses why neoconservatives might claim they don't believe in evolution by natural selection even though there is no scientific basis for that view.

update: link corrected thanks to VtCodger in comments.

Mainly, he suspects that it is a Strussian "noble lie," roughly that they believe that fundamentalist religion is needed for the good of socieity, so they pretend to agree with it. He mentions, but is not very fascinated by, the idea that this is partisan hackery -- that neoconservatives think the interests of the Republican party would be harmed if they didn't bend their knees before the fundamentalists. Of course the problem is that once one decides to lie, it is very hard to decide exactly how noble to be about it.

He doesn't mention the collosal arrogance of people who assume that biologists don't know anything relevant about biology which they don't know. I think this is always a risk in people coming from law or social sciences. They just have no clue how much evidence lies behind the claims of natural scientists and assume that they can bluff their way past biologists as they have successfully bluffed their way past say economomists.

In the second part of his article, Bailey argues that there is no scientific case against evolution by natural selection. Naturally it would come first, one normally doesn't question someone's honesty until one has exausted other options (although the NeoCons he quotes are pretty up front about how they start with the conclusion and work back to the evidence). I think the editorial decision makes sense as most Reason on Line readers don't really need to be convinced that modern biology is not all a big mistake.

I think Bailey's arguments for Darwin are weaker than his earlier analysis—not because he doesn't make a convincing case, but because he buries the lede. Basically he has a theoretical disagreement with a mathematician, then speculates about the origin of life, then asks if one can be both a Christian and a Darwinist (hint yes) and only then discusses some of the evidendence for evolution by natural selection.

But Berlinski stoutly declares in Commentary that he is no creationist. He claims merely to be engaged in critiquing the failures of Darwinism. Berlinski is particularly savage about what he regards as Darwinism's tautological character. "Time and again, biologists do explain the survival of an organism by reference to its fitness and the fitness of an organism by reference to its survival, the friction between the two concepts kindling nothing more than the observation that some creatures have been around for a very long time."

In Berlinski's view, evolutionary theory simply says that the ones that survive are the ones that survive. But that is not quite right. But that is not quite right. Darwinian natural selection sifts for useful variations among mutations, thus natural selection generates increased fitness, not just preserving the fittest. This process generates new species, species B being the descendant of earlier species A. This claim is clearly more than a tautology.

Wrong Bailey, the way to argue that something isn't a tautology is to point out a testable implication. Instead Bailey claims the stated theory is not quite right because it didn't include the word "species" even this explanation is incorrect (see below*) but the main thing is that the theory of evolution by natural selection has testable implications because organisms have detectable features which don't make any detectable difference.

The evidence for the theory became vastly vastly enormously gigantically even more immense than it was already when biologists began sequencing DNA. They found patterns explained by the idea some sequences don't matter and drift faster than others which do. Based on those sequences they can redraw the family tree of living things and lo and behold it almost exactly matches the tree drawn based on other features and based on fossils. Oh and one can check that the sequences that don't seem to matter don't matter and, so far, they don't. Before sequencing the evidence was weaker but already overwhelming based on traights which didn't seem important.

There might be another explanation for these facts, but no one has ever pretended to have one. Instead critics of biology like Berlinski and Kristol just ignore the evidence entirely. Bailey mentions it long after speculating at length about the origin of life (OK and I began indignantly typing before I read that far).

Berlinksi's claim is, I think, false as a matter of fact. Biologists do not claim that the survival of this or that species is evidence in favor of evolutionary biology. The evidence all concerns trivial things which are considered evidence of evolutionary history exactly because they have tiny or zero effect on fitness.

The quote of Berlinski (all I have read of his writings) does not disprove the hypothesis that he thinks that modern evolutionary biology is completely summed up by the phrase "the survival of the fitest." That is, indeed, a tautology. It is indeed part of the subtitle of "The Origin of Species." But I mean, to be fair to Darwin, one should at least read the full subtitle. Oh and maybe glance at the book. And to be fair to evolutionary biology, one would have to note that much evidence has been collected since then (not to mention the theory has developed).

I have Popper in the title, because Popper did the same damn thing in "The Open Society and Its Enemies." Popper at least asserted that something wasn't there -- predictions which have since been confirmed, explanations of puzzling facts, you know non tautological science -- which absolutely wasn't there. Popper, I think, assumed that he was brilliant enough to know what is written in a book after reading part (not all) of its subtitle.

* I think a biologist tried to explain this to Bailey and he didn't get it. The non tautological point is that the descendents of species A might belonge to species B and C two different species present at the same time. Now the claim that two different organisms belong to different species is *not* mere terminology -- it has an operational definition -- orgnaisms from two different species can not produce fertile offspring descended from both of them.

If evolution were always new species A replacing now extinct species B, then all we would know is that we choose to use different words for organisms of type A and B. Without a time machine, we can't test if they are two different species.

Now "survival of the fitest" does not logically imply that one species can, over time, split into two. This is a radical idea. It is also, in principle, experimentally testable, although the experiment will take a long time.

I personally think the experiment is under way and it is already clear that one species can split into 2 much more quickly than evolutionary biologists imagined. The experiment is raising fruit flies in laboratories. They are used to study genetics. Normal non mutant flies are called "wild type" but their ancestors haven't been wild for about a century now. They have been bread in labs from each other.

Interestingly when an actual wild male captured in the wild is mated with a lab bread "wild type" female, something happens called "hybrid disgenisis" which means the offspring are messed up. It is known that this is caused by a transposon (basically a very very benign virus) which keeps itself inactive in the genome of wild fruit flies by making a repressor protein. None of that protein gets into spermatazoa so if the transposon is in one of the male's chromasomes it makes copies of itself and spreads them around inside the chromasomes of the fertilized egg.

Evidently the transposon spread through the wild population after the ancestors of the lab flies were captured.

Some of the offspring survive this process. But already there is a barrier between wild and lab fruit flies after about one century. One can imagine that another hundred years or so, wild males will not be able to produce fertile offspring with lab bread females (just a few more such latent virus like things would do it).

Now to get two whole species it has to be blocked the other way too and the lab population is very isolated (also from other insects) and divided among labs so I mean maybe experimental speciation won't occur in my grandchildren's lifetime. But it's really close.

Radley Balko: Optimist, not Libertarian?

2009-09-28T12:02:00.000-07:00

Manufacturing evidence is apparently legal for prosecutors who then prosecute the case. This, at least, is the argument a couple of crooked prosecutors are making.

Radley Balko is more optimistic than I am about prosecutors:

If the Supreme Court...would essentially overturn Buckley and give prosecutors complete immunity, even when they conspire to convict an innocent person from the earliest stages of an investigation. The vast majority of prosecutors would never engage in such reprehensible conduct, of course. But it's curious why professional district attorney organizations and government agencies want to protect the lowly few who would.

I hope he's correct, but, if I believe Robert E. Lucas, Jr., prosecutors are Rational Actors, and therefore get rewarded by what is measured: convictions, conviction ratio, high-profile conviction, convictions for capital crimes, etc.

I didn't notice a metric for "losing when the client is innocent" on the list. So let us hope I'm wrong and most prosecutors are less than rational. It is, in any event, interesting to see a so-called "libertarian" website arguing that some people do not work in their own self-interest.

Last week on a floating buffet

2009-09-28T05:39:00.000-07:00

by cactus

I spent last week on a floating buffet. I had never been on a cruise before, and I was pleasantly surprised. The service was amazing, though I'm not sure having someone make the beds twice a day isn't overkill. The food, in general, was quite good. Even the buffet had great fare, though at the buffet one had to be selective because there's a lot of crappy food there too.

While I enjoyed the cruise, the ex-GF and I agreed it isn't really our thing. We're more the type to walk around and explore a city, using a hotel as a home base to store stuff. Having your hotel move to different locations is very nice, but you don't tend to stay in the same place for very long.

A few observations/random thoughts:

1. Even if the crew did not have uniforms on, it was fairly easy to differentiate them from the passengers. My guess is that the average crewmember weighs about a forty percent of what the average passenger weighs, even leaving out the retirees on the ship.
2. Each crewmember had a tag with his/her name and country of origin.
3. No more than a handful of the crew (of thousands) come from the U.S.
4. From what I could tell, almost all of the cleaning staff was from southeast Asia. I can only think of one exception.
5. The wait-staff was mostly divided among southeast Asians and eastern Europeans. The latter tended to be younger (early to mid-twenties) and less professional. (A number of the southeast Asians told us they had degrees in hotel management and the like.) However, the maitre d's and hostesses and the like tended to be eastern Europeans. The blonder the hair, the more front and center the station.
6. I don't think I ran into any African staff. That isn't to say there wasn't staff of African ancestry - just not from countries on the African continent.
7. If one doesn't drink and doesn't feel a need to buy jewelry in the duty free shops, a cruise is actually less expensive than other forms of vacation.
8. The ex-GF played at least a couple of hours of poker every day - they didn't have a dealer, but did have a table that dealt electronic cards automatically. The ex-GF came out barely ahead, but we ran some numbers and based on the house rake, the boat was taking in about a grand a day. Not too shabby.
9. The boat passed pretty close to Cuba. Remind me again - why does the U.S. government restrict its citizens from visiting the island? And do the folks who are the biggest promoters of that policy get to visit the place themselves, perhaps being exempt from the ban due to family reasons? What little faith the average Cuban might have in the regime would disappear if they could see the amount of waste these floating buffets can afford to generate on a daily basis.
__________________________________________
by cactus

How to target the poor?

2009-09-27T05:57:00.000-07:00

rdan

Several other conferences are happening elsewhere in the world, but with less fanfare than in Pittsburgh, both in media coverage and police activity. We do forget the 'smaller' issues of distibution of goods, so here is a reminder.

How to target the poor?

How can governments and aid agencies target the poorest? Some use detailed means tests, measuring assets and incomes. Others let the community decide for themselves. The first seems vulnerable to error and misrepresentation, the second to manipulation by elites.

One of the papers I’m most looking forward to at BREAD: a horse race between the means test and participatory methods.

When poverty is defined using per-capita expenditure and the common PPP$2 per day threshold, we find that community-based targeting performs worse in identifying the poor than proxy-means tests, particularly near the threshold. This worse performance does not appear to be due to elite capture.

Instead, communities appear to be systematically using a different concept of poverty: the results of community-based methods are more correlated with how individual community members rank each other and with villagers’ self-assessments of their own status. Consistent with this, community-based methods result in higher satisfaction with beneficiary lists and the targeting process.

Kharris clarifies the report in comments:

The "Target the Poor" study is based on experience in Indonesia, which helps to remind us (I hope) that not all policy solutions can be drawn from a US/Developed World context. Do we know that Indonesia has an income tax system that can stand up to the rigors of a reverse tax? Will the money arrive? No direct deposit for the target group. No bank account. Some may not live in a very monetized economy. A tax-based assistance program is better, I'd think, for the urban poor than the rural poor.

From the Into - "In developing countries, most potential recipients work in the informal sector and lack verifiable records of their earnings." Tough to offer a reverse tax in such cases.

A separate note - the study has to do with delivery, not dialectic. The assumption is that society is a given, and that the decision to help the poor has been made. Now, how best to go about it?

Honest elections on a continuum

2009-09-27T05:23:00.000-07:00

rdan

Chris Blattman has an interesting note reminding us of how US elections were done and offers a little consolation about elections in Afghanistan.

It's Not Just the Foreign Conservatives

2009-09-26T17:19:00.000-07:00

Once of the things that was clear at CGI this week is that the power companies that have looked into alternative energy sources have quickly realised they are not only good publicity but profitable (i.e., lower cost when used to scale). Florida Power & Light (discussed here) expanded an already major commitment, mostly in FL and CA. Jim Rogers of Duke Energy—a man who, since at least 2001 at Cinergy, has been going around saying things like "I cause 1% of the carbon put into the atmosphere. What are we going to do about that?" (It's much more since Duke Energy acquired Cinergy) and therefore is described in the business press as eco-friendly. (See here or here, for example.)&mash;was all over the place, announcing commitments and partnerships. And those are just the CEOs who were most visible at CGI this week, even ignoring the ExxonMobil people. (I looked for BP, but didn't see anyone. Probably next year.)

It should come as little surprise that the energy and power companies want to do something about Anthropogenic Global Warming: they went through the spike in oil prices a couple of years ago as well, and saw the customer reaction. If there was any doubt that it's not just a good idea but good business as well, $150/barrel and home heating oil spikes that flood the complaint lines and see the orders decline only solidified the idea. (Not to mention that they employ many of the people who will be leading the R&D of those alternative sources, from OTEC to solar to the newer, safer generation of nuclear plants.)

And now, we have utility companies making a sane decision: don't work with people who actively work against you. As Buphonia notes, Pacific Gas & Electric and PNM Resources of New Mexico have both decided to pull out of the U.S. Chamber of Commerce.

PG&E:

We find it dismaying that the Chamber neglects the indisputable fact that a decisive majority of experts have said the data on global warming are compelling and point to a threat that cannot be ignored. In our opinion, an intellectually honest argument over the best policy response to the challenges of climate change is one thing; disingenuous attempts to diminish or distort the reality of these challenges are quite another.

PNM Resources:

"At PNM Resources, we see climate change as the most pressing environmental and economic issue of our time. Given that view, and a natural limit on both company time and resources, we have decided that we can be most productive by working with organizations that share our view on the need for thoughtful, reasonable climate change legislation and want to push that agenda forward in Congress.

As a result, we have decided to let our membership in the U.S. Chamber lapse when it expires at the end of this year."

Somebody tell Joe Conanson. For an Aussie Conservative perspective, see here.

Open thread Sept. 26, 2009 (without GW)

2009-09-26T04:09:00.000-07:00

Open thread Sept. 25, 2009 (with GW)

2009-09-25T14:25:00.000-07:00

New Deputy Commissioner of Social Security

2009-09-25T13:49:00.000-07:00

by Bruce Webb

Balt Sun: Obama picks Carolyn Colvin for SSA Deputy

President Barack Obama has chosen Carolyn W. Colvin of Maryland to be deputy commissioner of Social Security, the White House announced Thursday. Currently special assistant to Maryland's transportation secretary, Colvin was Montgomery County Health and Human Services director until her dismissal by newly elected county executive Ike Leggett in November 2006. She previously served as a deputy commissioner at the Social Security Administration and is a member of the National Committee to Preserve Social Security and Medicare and the National Forum for Black Public Administrators.

I don't know anything about Colvin except that she perviously served as Deputy Commissioner for Programs and Policy in at least 1997, i.e. under Clinton. Here is a policy statement from her then: http://www.nls.org/passssa.htm.

Here is the SSA Org Chart: http://www.ssa.gov/org/ssachart.pdf In it you can see there is a Deputy Commissioner in the Office of the Commissioner which you could call "The" Deputy Commissioner and then 13 Divisions for various operational and policy areas, nine of them headed by a Deputy Commissioner for 'X'. Colvin is being slotted into the actual number two slot which naturally on this org chart is listed as "Vacant".

I don't know the implications. That she served in the Clinton era SSA is a mixed bag, that she is currently a member of NCPSSM is a good sign for supporters of traditional Social Security. And it is also good that she has a background as a line administrator as opposed to an academic background. Less likely to let policy get blinded by pretty theories.

In One Sentence What Once Took Four LONG Parts

2009-09-25T12:27:00.000-07:00

Once Again, D-Squared Explains It All:

[T]he Big Mac Index can plausibly claim to be the major methodological forerunner of Freakonomics, as it combines the two methodological techniques of choosing "quirky" instruments more valuable for their amusement value than their validity, and not checking anything to see whether it's economically meaningful.

I'm not certain that "economically" is strictly necessary there.

Frankly I'm with Frank

2009-09-25T11:25:00.000-07:00

Probably I accept elimination of the rule that financial companies must offer plain vanilla products for a different reason, since he isn't as ignorant as I am, but I would think that with a plain vanilly requirement, banks would offer plain vanilla products on terrible terrible terms. 30 year mortgage OK but the interest rate is 10% per year say.

To the extent that people use the plain vanilla product to judge the fudge swirl products, this will trick them into thinking that fudge swirl is great for their health. In fact, I'm amazed that bankers aren't already using that scam.

Now to be franker than Frank, I assume there is a back room deal in which the finance lobby agrees not to use extreme methods to fight other reforms so long as the plain vanilla is in the trash can. I mean the arguments made in public by politicians are justifications of decisions which are often made for other reasons.

Explanations of what the hell I'm talking about after the jump.

Glossary

"plain vanilla adj applied to financial services. It means like your father's financial services for example 30 year fixed rate mortgages or you borrow at exactly 20% no matter what credit cards. It was proposed that financial service companies be required to offer such products. Somehow that provision has been deleted from proposed reforms.

Fudge swirl adj. an alternative to plain vanilla. Does *not* imply that financial service companies will necessarily mislead with confusing technical truths and near truths until customers heads spin if they don't just sell plain vanilla products. Any such inference falsely ascribes an attitude of reflexive hatred of financiers to Robert Waldmann ~~some~~ one of whose ~~best~~ friends is a hedge fund manager.

Frank: noun corresponds to the adjective frank and to the chairman of the house banking committee. ~~The only~~ proof that it is possible to be simultaneously intelligent honest and a congressman. Just argued

I remember the days when the bars had to serve food if they were going to serve liquor, and they served [the most] God awful food known to human beings, and I think you know trying to force someone to do good is a very, very qualitatively different, and I think often futile, effort, rather than preventing [someone] from doing bad.

As noted above, I find that argument convincing, but I doubt that representative Frank does.

Frankly I'm with Frank: truely obscure outdated pop reference to the lil Abner comic strip.

Shmoo: a creature in lil Abner. State of stressed yeast cells which enables them to survive stressful conditions, and a fundamental false assumption in growth and real business cycle theory which caused economist in Cambridge UK (who did not have acces to lil Abner) to have a cow (which is not a shmoo).

The Fed's moving target: NAIRU

2009-09-25T10:09:00.000-07:00

by Rebecca

Neal Soss and Henry Mo at Credit Suisse published a very interesting article, "Where is full employment in a more volatile macroeconomy?", where they argue that the natural (long run) rate of unemployment may be shifting (they do this by showing that the Beveridge curve, which plots the the job vacancy rate against the unemployment rate, is shifting upward). I cannot provide a link, but here are their conclusions pertaining to monetary policy:

In the case of rising NAIRU [RW: this is the rate of unemployment that does not grow inflation, often called the long-run rate] and higher economic volatility, the monetary policy implication is complicated.

On the one hand, a higher NAIRU suggests that it would require a strong and prolonged recovery for the unemployment rate to return to the level attained in the past two decades. This scenario argues for a long period of low interest rates, because the economy’s structure will make it harder to get unemployment back to the low levels of recent business expansions.

On the other hand, a higher NAIRU suggests higher inflation pressure, as the output gap is smaller than otherwise would be the case. In other words, the Fed would have to normalize its policy stance sooner than would have been the case warranted by a stable NAIRU.

The burden of this is likely to be several years of quite low short-term interest rates by any modern standard other than the zero-ish levels of today. Even if the NAIRU is deteriorating, it is likely to be several years before the economy generates enough of a drop in unemployment to get to the new NAIRU, presumably above the levels of the last 20 years but surely below the current 9.7% unemployment rate. Between now and then, high unemployment is likely to remain the focus of policy attention. Labor market policies, such as job retraining for the unemployed, to improve the inflation unemployment trade-off, would make the central bank’s job a lot easier as that longer-run unfolds.

Basically, if the long-run level of unemployment, which the Fed targets implicitly under their dual mandate (maximum sustainable employment and stable prices), is changing then the Fed’s job becomes that much more difficult. Policy is only as good as the model’s calibration: they need to confidently estimate and target a level of employment that may be very much in flux. A simple Taylor Rule estimation illustrates this point.

Note: The Taylor Rule is a policy rule that relates the federal funds target to inflation and the output gap: roughly speaking, as inflation rises relative to the output gap, the Fed should tighten (raise its target); and as the output gap rises relative to inflation, then Fed should ease (lower its target). I estimate the relationship, and you can view my data here, and Wells Fargo's forecast here.

On one hand, the CBO projects that NAIRU is 4.8%. In this case, the Taylor Rule policy drops the fed funds target to -4.6% by the end of the year. Put it this way: the output gap is so big that policy is very, very aggressive but bound by zero.

On the other hand, if NAIRU has shifted to something more like 6% - this is roughly its level in the 1980’s - then the policy prescription is less aggressive. The output gap remains wide, but the implied target rises to -3% rather than almost -5% - still negative, but suggestive of a more benign policy strategy. Inflation pressures would start to build earlier than under the 4.8% case.

This complexity has been documented by the Fed in the minutes of their August 2009 meeting:

Though recent data indicated that the pace at which employment was declining had slowed appreciably, job losses remained sizable. Moreover, long-term unemployment and permanent separations continued to rise, suggesting possible problems of skill loss and a need for labor reallocation that could slow recovery in employment as the economy begins to expand.

Note: this not the same thing as a jobless recovery – the unemployment rate may very well fall with economic growth (no jobless recovery), but then settle at a structurally higher level.

Rebecca Wilder

P.S. I will not be able to respond to comments until tomorrow.

So Did Lucas Create HyperRational Expectations?

2009-09-25T06:26:00.000-07:00

D-Squared:

Lots of people appear to be forgetting this one or getting it wrong...the central model of The General Theory of Employment, Interest and Money is a rational expectations model.

The difference with the soi-disant "rational expectations" school is over the expectations-forming process with respect to the effect on price and output of monetary policy, not anything else. Hope that's cleared up now. [emphasis, style change mine]

I think I see the problem now. Everyone obsesses over every aspect of fiscal and monetary policy. When do they work—and, more importantly, how do they develop skill sets and core competencies ("competitive advantages")—in the Lucas model?

Where Can You Be?

2009-09-25T05:45:00.000-07:00

by Noni Mausa

Believe me, I am grateful. It saves me so much time and trouble in listening to government officials, to know that once they use the word "academic" as an epithet I can stop listening at once and go take a shower instead.

In their minds, "academic" means "someone who spends their whole working life studying, researching and teaching one specific topic, and who therefore knows less about it than the boyos down at the Salisbury House Saturday morning breakfast club.

Rich Coleman, BCs Minister of Housing and Social Development, sprang the A word early in his CBC interview Thursday morning, as he pooh-poohed the insistence of Helen Lenskyj, author and professor emeritus in sociology at the University of Toronto, that virtually every Olympic host city swept their homeless under the rug prior to the big event. "This government has spent more money on housing initiatives than at any time in BC government," Coleman proudly said, after he lost interest in declaring that Dr. Lenskyj didn't know what she was talking about because she had never delivered a social program. Oh, and Coleman added that the proposed bylaw giving the police the power to move people to shelters by force in bad weather is totally unrelated to the looming Olympic invasion, due to strike during the bitter bonechilling cold of Vancouver's -- umm -- rainy season.

(Sorry, I am from Winnipeg (the place where Celsius meets Fahrenheit every winter) and I must scoff. Nyah, nyah, our homeless are tougher than your homeless.)

The whole predictable, lamentable situation of shifting the homeless along like a quadrennial cattle drive, leads me to another rather claustrophobic question. I will get there by way of a roomful of pennies.

Long ago in university, our professor in Psych 101 asked us all to take out a penny and flip it. Those who got "heads" flipped again. After a few iterations, we were left with only a couple of people out of a room of 300, whose every flip had come up roses. Were these people some miracle-workers? No, even we clueless undergrads could not miss, seen in the aggregate, the falsity of that idea. The "winners" had just by random luck threaded a maze and popped out the bottom when so many had been held back, also by plain chance.

Shift your view to the job market. It's true that skill and education and aptitude effect who is employed and who isn't, but luck also plays a part, and as productivity becomes higher the spots available to be fought over become fewer. In a country of millions, many will flip and continually get tails, and wind up with no income at all.

Question -- in a free nation, where can the man of many tails be?

Literally, where can he be? If a citizen cannot rent or buy, if he fears the tuberculosis or violence of shelters, if he cannot even set up a tent in the wilderness (it's Crown/Federal land, not his) than where can he be?

Everyone has to be somewhere. Where can you be, when your pennies give out?

[Crossposted from the Canadian blog "The Galloping Beaver"]

CGI Yesterday: Interlude

2009-09-24T06:17:00.000-07:00

I don't have my notes all together from yesterday, but Lance Mannion hits most of the second half of the day with this, this, this, and this post.

Especially check out the last one. One panelist's description yesterday of putting glasses on a child yesterday was as if it were directly out of the opening of Lawrence Norfolk's Lemprière's Dictionary:

The lenses sucked his eye-balls through the frames, dashed them into the first elected object. The stove. He was in the flames. They were licking greedily at him…behind the flames two eyes caught his, an horrible, misshapen face, a twisted body, eyes black with ancient cruelties, the legs curling and unfurling at him, like serpents. I see you John Lemprière, hissed from each mouth. Erichthonius. Curling and unfurling like snakes. Like flames. Just flames. Flames in a stove in a room. A room between Minerva’s shrine and Vulcan’s forge.

‘Welcome to the visible world, John Lemprière.' ...

Lempière shivered and blinked. The stove was but a stove, the room but a room….Lemprière could see.

People who have seen miracles want to see them again, not the mention the effect on people for whom seeing is a miracle.