Saturday, January 31, 2009
And yet, and yet!, David Brooks of the New York Times apparently does not have a copy of the Wall Street Journal, and, not only that, had apparently not read the front page of his own newspaper, because what does he write in today's grey lady? "A governor with a few-hundred-million-dollar shortfall will suddenly have to administer an additional $4 billion or $5 billion. " Oh, is that why NYC is laying off 23,000 people? Because they are soon to be so flush with cash that they don't know what to do with it? Or did he just got his ole' numbers reversed. Isn't it really because NYC has a $4 billion dollar deficit and will likely only get a few hundred million from the "stimulus"? Isn't it b/c state governments like California have a $42 billion shortfall, and are only going to get a few hundred million from the "stimulus" plan?
It's sad to say it, but the above are follies in policy that President Obama owns. It is his policy to lay off government workers in a recession. He could easily have proposed an extra $200 billion for states. While doing so, he could have held conference calls with state and local officials, telling them not to cut their budgets, and getting feedback on what projects they need done. And because he has not, government appears to be making the recession worse. And the evidence suggests that he made these errors because he is ill-advised by his lead economic council.
"Another cause of long-term unemployment is unionization. High union wages that exceed the competitive market rate are likely to cause job losses in the unionized sector of the economy. Also, those who lose high-wage union jobs are often reluctant to accept alternative low-wage employment. Between 1970 and 1985, for example, a state with a 20 percent unionization rate, approximately the average for the fifty states and the District of Columbia, experienced an unemployment rate that was 1.2 percentage points higher than that of a hypothetical state that had no unions."
But of course, correlation does not equal causality, my friends. The upper midwest -- the rust belt -- has higher rates of unionization and has been bleeding jobs for a generation. Is it b/c of the unionization? Let's look at the time series evidence. In the mid-1950s and 1960s, the unemployment rate in the old industrial midwest was much lower than today. In addition, the unionization rates were much, much higher than today. Hence, now we could just as easily conclude that high employment rates are correlated with high rates of unionization across time...
It's also worth mentioning that many of these old union jobs were in manufacturing. America doesn't manufacture all that much any more. It's done in China.
According to Summers,
"To fully understand unemployment, we must consider the causes of recorded long-term unemployment. Empirical evidence shows that two causes are welfare payments and unemployment insurance. These government assistance programs contribute to long-term unemployment in two ways."
OK, but then what caused long-term unemployment before welfare payments and unemployment insurance. Why, without these two causes of long-term unemployment, was 25% of the labor force unemployed when FDR took office in 1933, almost all of them having been unemployed long term? And, why, then was the unemployment rate in 1928, during a stock market bubble, but before the New Deal, 4.1%, while the unemployment rate in 2000, when we've got welfare and unemployment insurance, just 4.0%?
Friday, January 30, 2009
Just scroll down the right-hand side and you'll see it. Just down a little further past David Warsh's Economic Principals, past the Krugman and Rodrik blogs, past Deirdre McCloskey's blog but before Greg Mankiw (fittingly). Wait a sec., since when does Deirdre McCloskey have a blog? When did that come out? I mean... well... Who knew?
But I digress, we've gone big-time!
Thanks to all our fans and supporters over the weeks who have made this possible...
(Update: McCloskey's also got a photo gallery! U have to know the story...That's got to be the most narcissistic webpage i've ever seen... )
Thursday, January 29, 2009
Heil Oregon Rep. Peter DeFazio!
Anyone who can see thru Summers bullshit is a smart dude.
He says "I think he's ill-advised by Larry Summers. Larry Summers hates infrastructure"
Indeed. Eff Larry Summers!
He also said Chicago has a $6 billion deficit in infrastructure projects, is only getting $250 million to combat deficit... Gives the lie to the whole argument about there not being enough "shovel-ready" projects...
Fire Larry Summers. Fire him now!
Much of what he writes is right-on, and reflects sentiment I've been thinking about, complaining about, and writing about for years. Yet, there is one fundamental point that he makes that is just completely off. There is almost no difference whatsoever in how "freshwater" and "saltwater" economists are trained. I was trained by "freshwater" economists, and it just so happened that we had almost the exact same syllabus as did Princeton! So much so that I downloaded and used notes from Princeton U. occasionally... Add to that I did an MA before I started my PhD, the MA done at a "freshwater" school, the PhD at a much saltier location, and guess what, there was almost no difference whatsoever in the way the 1st year was taught. It was freaky, and in an Animal Farm, 1984'ish sense, that, "ack! everyone thinks the exact same way!". Krugman is profoundly and utterly wrong to suggest that any sort of deep chasm exists.
Now, there are two interpretations one can make of this, one respectable, one decidedly less reputable. The first is that there is just widespread agreement about what every PhD should know, and what skill set a Ph.D. should have. The alternative explanation is that no economists can think for themselves, and so they just do a combination of what they were taught and what they perceive everyone else to be teaching. As it happens, the first explanation does not hold up -- much of what is taught in the first year truly is worthless. There is no real thought involved, just endless math. There's no reading involved, no writing; just proofs and lots of fast algebra. Exams (for you do not read nor write anything when receiving your core training as a PhD), graded by TAs, are just regurgitating proofs plus an algebra marathon. So, Krugman was profoundly wrong; all Econ Ph.D.'s are trained like robots to do fast algebra. Of course, computers can do algebra more quickly and more precisely. That's not the point. The rationale is the same as training modern military men with hand-to-hand combat. It's to put hair on your chest and to make you committed to the system. To institutionalize you.
And it does put hair on your chest. The only problem is that if you go into a Ph.D. program as a market fundamentalist, you will exit as a market fundamentalist, b/c history is decidedly not taught. I can see it with job market candidates. They all think they have to flex their mathematical muscles in their job talks, and so the basic paper in economics takes a conjecture, often unsupported by any seriously-considered logic or data, and they make a hideously complicated model full of assumptions that nobody believes, and then arrive at a conclusion which matches their priors. In this way, they don't need to form an argument that their prior beliefs are correct; they've just proved it! And in doing so, they've insulated themselves from any need to support their arguments with reason...
Angry Bear is going on and on about the supposed Freshwater vs. Saltwater debate. http://angrybear.blogspot.com/ . They are taking a holier-than-thou attitude. As liberal saltwater economists, they are proud that they aren't like those crazy UChicago wackos. The problem is that there is really only a very subtle distinction. All economists, liberal and conservative, were trained in the same way! Those of us who were liberal when we came in, are liberal now. Our basic methodology is no different; for if it were, we would not be able to publish in top journals...
Over at Angry Bear, someone writes: "In the field of macroeconomics there is a much deeper division between macroeconomics as practiced at universities closer to the great lakes than to an Ocean (Fresh water economics) and that practiced at universities closer to Oceans (Salt water economics). " This is complete crap. What's the supposed difference?
"Roughly Fresh water economists consider general equilibrium models with complete markets and symmetric information to be decent approximations to reality. Unless they are specifically studying bounded rationality they assume rational expectations, that everyone knows and has always known every conceivable conditional probability."
Please. Saltwater economists learn exactly the same models in the first year. And freshwater economists will learn Neo-Keynesian models as first years as well...
They go on to write: "Finally I have a view of how people can devote so much effort to working out the implications of assumptions which almost no ordinary people would find other than nonsensical if they understood them. Fresh water economics uses difficult mathematical tools. Students in fresh water graduate programs have to learn a huge amount of math very fast. It is not possible to do so if one doesn't set aside all doubt as to the validity of the approach. Once the huge investment has been made it is psychologically difficult to decide that it was wasted. Hence the school gets new disciples by forcing students to follow extremely difficult courses. Last I hear very few graduate students at U Minnesota came from the USA. Undergrads over there know what the program is like. If my information is not out of date, innocents from abroad are the new blood of fresh water economics.
He actually makes a good point here; the only thing I'm quibbling with is that the above actually describes remarkably accurately what happens at pretty much all PhD programs in economics. You spend huge amounts of time investing in learning how to build models, so much so that you become psychologically invested in the process. It becomes 2nd nature. After awhile, it feels funny to read an argument that isn't supported by equations. So verbal arguments are dumped for matrices, derivatives, indirect utility functions, and expectation's operators. Proofs take the place of actual reason. The long lists of assumptions necessary for these models, too, become 2nd nature. What does not happen, however, is that one learn anything of actual use. The long parade of conservative economists, from their lofty perch in academia, unacustomed to making arguments backed by logic and trying to comment on the current crisis, revealing that they know no more than a guy on the street about subjects about which they are ostensibly experts, all but proves this fact.
While I'm attacking the profession, let me say that the main problem is that it's really difficult to find good papers that I can read, and walk away feeling that I've learned something new. The experience I've had repeatedly is that once I read any of the famous results in the past 30 years, the more carefully I look at the paper, the more they turn into total shit. The RBC model, for example, which all first year students study, says nothing about the current crisis. Alwyn Young's famous paper on productivity growth in the East Asian NICs turns out to have been faked. Alwyn Young is a sheer snake-oil salesman; he just knew how to work the system and get four pub's off of one idea for a scam. Daron Acemoglu won a John Bates Clark for creating a data set that was later revealed to be a fraud. Even in Krugman 78, for which he won the Nobel, I got the whiff of a scam. Krugman fallaciously presented the result that varieties increase due to trade as a general result; it's really just specific to his assumptions, engineered to put trade in the best possible light, probably in order to help grease the wheels for publication. The "Rose Effect" of currency unions on trade? Utter horseshit. The effect of openness on growth? Sheer crap. Growth accounting? Worthless. Game theory? Pretty much unusable in real world situations. The idea in academic research is to try to scam the referees. Get a creative idea, preferably about current events -- the financial crisis! economic growth in China! the decline of american manufacturing! Writing a "research" paper on it will consist of creating a detailed and hideously complex model that will yield a counterintuitive conclusion (which matches your priors). You need not actually know or have to read anything about manufacturing, of course, the model will suffice. Then grab a data set (about which you know nothing about how it was created, but, who cares, it was used for an AER pub; it must be good!), run a regression! and then thank all of the famous people in your department on page 1. If they are famous enough, you've got a pub at a top 10 journal; if not so famous, then perhaps you can aim for one of the field journals...
Yet, let's step away from research. Sure, that might be worthless, and the senseless drivel pouring forth from conservative Nobels now suggests that Economists just don't make good policy advisors, but don't economists also teach? People in the profession will burst out laughing at that, for economists put almost no weight on their teaching; we really have it made. After being trained hard-core in math in grad school, all we need to do for the undergrad econ majors, who, for the most part, have very little math training, is throw up some equations, maybe a derivative or two, and the students will find it difficult enough. Don't even have to prepare for lecture. Can download the multiple choice exams from the publisher. It's cake. Doesn't even require any actual thought.
Of course, undergrads learn almost nothing from their econ courses...
Wednesday, January 28, 2009
Naturally, the import of this really started getting to me. It hasn't even been 20 years since Tiananmen, and still. It's not a little moving editing what can only be read as a plea for democracy. For the realization of dreams deferred, from the May 4th movement in 1919 to 1989 to 2009. One wonders, if a colored man can ascend to the presidency, then, so too, might China one day be a democracy. (I sort of wish Obama had said this in his inaugural speech...)
Feeling all warm and fuzzy, I couldn't help but recall the last time I had the same feeling, during Lowery's benediction. He totally stole the show...
Tuesday, January 27, 2009
all i hear is dissonance...
Summers and liberals argue for stimulus. yet what in our eyes has appeared? Tax hikes and regression on environmental programs... This is not change Thorstein Veblen can believe in.
Hasn't anyone in gov't a brain? As liberal Dems, now what is our excuse? We've got the Senate, and the House, White and otherwise.
And yet draconion policies persist. Oy vey!
Thorstein Veblen is still worried. He's had enough.
Why is everyone arguing about the stimulus? What stimulus?
Thorstein Veblen is trained in the art of math. Watch him work.
The size of the US economy over the next three years is $45 trillion.
US state government budget shortfalls over this time period are $350 billion-plus. Substantial cuts have already been made... Local budgets are also getting the ax. (Philadelphia has a $1billion shortfall over next few years, is cutting... NYC is increasing metro fares... Florida has cut environmental programs and has raised taxes on nursing homes... etc. etc.etc.etc.)
Take away the state and local budget cuts/shortfalls, and we're left with maybe $450 billion left of stimulus over 3-4 years. Divide that by an economy over 3 years worth $45 trillion. Left with an optimistic estimate of a stimulus of 1% of GDP per year.
Poor Monty Python's arms have been chopped off, and we're treating it as a mere flesh wound...
"Explicit nationalization of financial companies has little support among key Obama officials, sources said. Treasury Secretary Timothy F. Geithner and top White House economic advisor Lawrence Summers believe governments make poor bank managers and cannot efficiently manage a vast number of institutions, according to some of their associates.
Taking over a substantial portion of a bank's stock and wiping out the investment of the firm's other shareholders could also precipitate a sell-off across the banking system as investors flee, fearing they could be next."
It's a futile fight, but I'll write on regardless: Summers needs to go.
Judging from his article, I think I'll pass on buying the book. I start off deeply skeptical of the claim that we shouldn't give aid b/c it will only hurt the poor, so I went in wanting to read one specific, plausible avenue via which aid hurts Africa. In the article above, Glennie couldn't even do that much. To me, that's fairly damning. Who can stand to read vague platitudes? Particularly when those platitudes are diametrically opposed to one's priors? As a rhetorical device, when you are going to argue against something that many people strongly believe in, vague platitudes are just not the way to go...
Glennie says that instead of aid, we should "overhaul the rules on international property rights...act on climate change" and "regulate better an arms trade causing turmoil in Africa"... OK, the first is just flat out not going to happen. The second "act on climate change" I'm all for, but this won't do anything in the short run to alleviate poverty in Africa, and should not replace aid. More regulation of the arms trade is also a good idea, but I can't imagine this will have a cheap price tag either, and with the Russians and Chinese out there as suppliers, I think it would be better to focus on reducing the demand for war rather than the supply of guns. For if there are buyers, there will be sellers...
He writes things like "aid conditions have weakened African businesses on the other, putting hundreds of thousands of parents out of work." And, one suspects, aid also takes food out of the mouths of millions of infants. Now, I doubt this very much, even more so b/c he doesn't even attempt to explain why aid puts hundreds of thousands of parents out of work.
The most specific thing he mentions is the problem that "Donor governments attach strings". What strings? I guess we'll have to read his book to find out... He says that these strings mean that "Aid dependency has ... undermined the accountability of the African state to its citizens." OK, but aid definitely flows, in general, way more to states which are democratic. If you want a cut in your aid budget, the easiest way to get it is to stop holding elections. As it happens, I think it is clear that democracy is not at all necessary for development, so Glennie seems wrong here on two accounts...
To sum up, maybe he wrote a great book, but everything about his article linked above rubs me the wrong way...
Plus, America, with an economy worth about $15 trillion a year, gives about $15 billion in Aid. It's peanuts. And the biggest aid recipient (last I checked) is Israel; other big recipients are mostly "allies" in the Iraq war. So we really give pennies to Africa. Why do we need a book which tells us that we should even be giving less?
Friday, January 23, 2009
First, it does not mention Chinese local government's planned $1 trillion in announced new spending. This may be all smoke and mirrors, but it at least deserves mention.
One thing it gets wrong is that the US government plan is not "all new spending" either. With massive cuts in state and local budgets, much of the US federal stimulus is merely offsetting cuts elsewhere... As written before on this site, in the next three years, state govt's face expected shortfalls of $350-70 billion, and this is after many have already cut their budgets. City and local governments are also in cutting mode. This might pair the true size of the US stimulus in half... And since that is the government spending half, it means trimming the expected effect of the stimulus by about 2/3rds.
Another thing it gets wrong is that much of the stimulus spending in the US plan is not shovel ready, and so it will take more than two years for the whole thing to kick in...
Given those three crucial errors, the article's conclusion that our stimulus package is larger than China's would probably not stand. (That's understated for dramatic effect.)
One interesting part of the article, though, is this: "Bank lending jumped in November at the fastest annual pace in nearly five years, as the state-controlled banking sector responded to regulatory pressures to step up lending." This is really what we need in the US...
Tuesday, January 20, 2009
US: $825 billion, 4.8% of GDP over two years (or more)... of course, if we subtract off reductions in state and local spending, then we'd get something closer to about $600 billion, or 3.6% of GDP...
China: $1.4 trillion total!
Europe: 200 billion Euros... (although last I saw Europe still has inflation, so they still have some leverage to fight by lowering interest rate, as they are still at 2 percent (stupid!)...)
UK: 20 billion pounds... (and described by Germany's finance minister as "crass Keynesianism"!)
Japan: I saw 1% of GDP, including .06% on public works...
Korea: I see has a $11 billion stimulus package, but then again they grew at 4% last year, and are expected to grow at 3% this year -- so their stimulus is merely precautionary...
I'd like to see more data, but i suspect these line up perfectly -- China has the largest stimulus, and has grown the fastest in recent years; the US has the 2nd largest stimulus, and has had roughly the 2nd fastest growth in past 20 years, and Japan and Europe have done worse, and have dumb, smaller stimulus packages...
I've always said, if you wanna know if a certain policy is good for development, look at China. If you want to know what policies aren't good, look at what Larry Summers is doing. China hoarded Treasuries so they could spend them in crises like now. Larry told them they were foolish. (China is looking smart about right now...) Now Larry is imposing fiscal austerity on America, while China is going all Keynesian. Who's right? I've got my money on China...
Time to learn to speak Zhonguohua... So we can communicate with our future masters...
Update: I researched this post waaay too quickly. It turns out that China followed up the initial stimulus with more spending from provincial governments to make the total $1.4 trillion! What are they spending on? Infrastructure, light rail, increased social spending... and... and... UNIVERSAL MEDICAL CARE!
Seriously, what's the possible harm of just upping the aid to states from $79 billion to, say, $279 billion, and just printing the difference?
Sunday, January 18, 2009
Saturday, January 17, 2009
A Korean government emissary met with Deputy Treasury Secretary Larry Summers, asking him to ask Wall Street to roll over Korea's short-term debt. After all, Korea had been growing at 8% a year for literally decades, and once the crisis passed, they would have no problem paying off their debt, if only they could exchange their short-term debt for debt of longer maturities.
As Deputy Secretary Summers *knew*, however, the problem was the fundamentally un-American, interventionist Korean government, and without forcing fiscal austerity policies on it and forcing many banks to fail, Summers *knew* the problems wouldn't get any better.
"That's not how we do things in America. You know our system. We don't tell our banks what to do." [I'm paraphrasing here obviously... but the implication was that the problem with Korea was that there was coordination between banks and government...]
I guess those days are over... Now American banks all rely on the government to keep them solvent. That's how we do things in America. I just wonder how long it will be before Summers convinces Obama that we need to let a few banks fail, to purge the rottenness out of the system, and stop guaranteeing bank deposits, which only causes moral hazard, like Summers advised Indonesia...
Post-script: Once the korean crisis got really bad, the Germans eventually pushed the IMF/US Treasury to talk to the Wall Street banks, whose only complaint will rolling over their debt was that they hadn't been asked sooner... (and that some I-Banks were left out...)
Friday, January 16, 2009
This makes me want to cry.
Greg Mankiw & Thomas Sargent are two very top academic
macroeconomists. They also know nothing.
Via Greg's blog, Thomas is quoted as saying, "The calculations
that I have seen supporting the stimulus package are back-of-the-
envelope ones that ignore what we have learned in the last 60
years of macroeconomic research."
60 years! So, 2009 - 60 = 1949... So, basically, everything we've learned about Macro not counting JM Keynes General Theory (1937)! Or of what we learned from the Great Depression!
As it happens, I've taken several graduate macro courses, several from top 50 macroeconomists. I learned almost nothing in them, except I got really good at doing lots of fast algebra... There was nothing more to any of these courses. I never once had the suspicion that those teaching the courses, once again, top academic macroeconomists, knew anything more about macro policy than a guy off the street.
What I don't understand is why we have these twin problems of deflation and debt. Isn't the obvious solution to one something which will would reduce the other? We pruned the stimulus package over concerns about our debt. But why not just print money? How 'bout a little more quantitative easing? Why couldn't we just have Treasury print out $100 billion more in fresh cash, and send it off to states and city governments for them to spend? The worst that could happen is that it wouldn't eradicate deflation, and would *only* reduce our debt. The best thing that could happen is that it would ignite inflation -- killing two birds with one stone.
What if it did ignite inflation? Well, then the economy would be moving again, and then the economy could be controlled by monetary policy. I mean, that's the whole goal here isn't it?
It turns out that Summers has explained to Obama about how, if we have too big of a debt, foreigners won't invest in the US anymore. This was the exact logic which led Summers & Geithner to force high interest rates on Asian countries during their financial crisis (although it should be mentioned that Summers & Geithner were also able to force the asian countries to open up their financial markets to 'more efficient' Wall Street). How in the world did we end up being led, in this crisis, by those who botched the Asian financial crisis? And hows come nobody is making note of this fact?
I'm *sure* they are correct, but let's do some quick math to double-check...
California's budget deficit for the next 18 months is $42 billion. (Of course, this is on top of a bunch of cuts... California's state gov't and the UC's have not yet gotten the memo that loads of money is on the way, they are still in cutting mode.)
Texas's budget shortfall the next two years is estimated somewhere between $6 and $24 billion...
The city of Philadelphia has an estimated budget shortfall of $1 billion over the next five years...
New York City -- $1.2 billion budget gap (I see $1.5 elsewhere); raising tolls for transit and is cutting services...
Many states have no deficit, of course, because they've got balanced budget amendments! They're just cutting spending!
The state of Florida just cut spending for the upcoming year by $1.2 billion -- with massive cuts in environmental programs, and is increasing taxes on retirement homes. This is in the face of an estimated $3.5 billion deficit for one year. (Given that Florida is ground zero for the housing bust, one wonders if this forecast isn't optimistic...)
Of course, the plan also includes money for medicaid and local school districts, and this will help states, but it seems to me to be way short. It's also not clear to me that there is any moral hazard here -- states which are cutting their budgets in the middle of a recession deserve to be punished for stupid behavior. States running large deficits should be rewarded.
OK, let's see what four minutes of research did: 56 + 24 + 1 + 2.4 + 7 = $90.4 billion (numbers extrapolated for two year deficit)
Not to mention, what about smaller states? Let's start adding in smaller states here too...
Indiana -- $800 million, this year alone (though a purdue university economist denounced this as unduly optimistic)
Illinois -- $800 million, this year alone
Kentucky -- $400 million shortfall, thru next June... f
South Carolina -- Already! cut budget by $720 million, more to come...
According to this (http://www.cbpp.org/9-8-08sfp.htm), over half of states "have already cut spending", and it estimates state budget shortfalls of $145 billion, althought this doesn't count city shortfalls, so it's a rather lowball estimate...
They write: "For example, at least 22 states have implemented or are considering cuts that will affect low-income children’s or families’ eligibility for health insurance or reduce their access to health care services. Programs for the elderly and disabled are also being cut. At least 21 states are cutting medical, rehabilitative, home care, or other services needed by low-income people who are elderly or have disabilities, or significantly increasing the cost of these services."
But don't worry, Larry Summers is on the case. He knows all this stuff. And he's gonna fix it... He & Geithner know California is not Korea, and hence, we don't need a fiscal austerity program. We don't need Summers & Geithner to force a balanced budget amendment down our throats.
Obama says he's up for suggestions. Here's one: Up the aid to states by $300 billion to help cover the estimated budget shortfall thru 2011 of $355 billion. Let them do what they want with it...
Barack Obama, it's time to fire Larry Summers. Fire him now...
Wednesday, January 14, 2009
If Not Now, When?
Real change almost always comes in the face of crisis. So if you believe that Global Warming is real and that sometime soon will have to be confronted in a big way ... and if you believe that our reliance on oil is not only an environmental threat but a threat to our economic security and national security as well ... and if you believe that we need to start manufacturing things that people in other countries want to buy, when else do you expect real change to come on these issues -- a real start on the big changes -- if not now?
It's a lot to expect early in an administration. But look through a couple centuries of our history and you'll see that there are just no examples of administrations that started small and did big things in year 2 or 4 or 6. That doesn't happen. Look at Roosevelt, Johnson, Reagan, presidents pack their biggest punch on day one. And even though many big things can happen in subsequent years, the presidencies are almost always defined at the beginning. Later triumphs and reforms grow from the changed political terrain created at the outset.
A lot I've written over the last few weeks that's been critical of what seems to me like a too little ambitious approach from Obama. But I base that on a belief that the current economic crisis is just the immediate hole we find ourselves in, perhaps the immediate manifestation of these other deep and critical challenges I noted above -- all tied to unsustainable reliance on fossil fuels, financialization of the US economy and decline of US manufacturing. I don't think we have much time to spare.
He's exactly right. Now is the time to make change. If Dem's do nothing about universal health care, energy independence, increasing the minimum wage (substantially), or to revamp education and curb outrageous executive pay now, when would we do it? When is the next time the stars will aline like this? Could be decades... I thought the plan was to throw "long and deep"?
The line: since private investment equals private savings plus public savings, increasing gov't spending cannot employ people who are unemployed, it can only crowd out private investment.
I.e., he writes: PI = PS + GS (let's ignore his retained earnings for a minute).
Pretend for a second that you were just an ignorant University of Chicago economist, and hence, that you knew nothing about the Great Depression. In particular, you had no idea that the US economy grew at 8% from 1933 onward, once FDR started increasing spending, and that you didn't know that massive increases in wartime spending ended the Great Depression.
Other than to look at basic facts, how else might we refute free-market Fama?
Well, one way is that we could recall another identity, that private investment is the sum of investment in capital plus investment in inventory. In good times, of course, firms might borrow money to invest in building up inventories to sell during the Christmas shopping season, for example, but at the moment inventories are piling up b/c manufacturers can't sell what they've already produced. Hence, they are cutting way back on production, laying off workers, closing plants, etc. New investment in capital and machinery is pretty much nonexistent at the moment.Then there's the problem that banks are just sitting on hoardes of cash at the moment, afraid to loan it out, which also counts as "investment". So Fama's argument boils down to not wanting to see gov't spending crowd out "investment" in inventory and bank's cash reserves... The next problem is that who cares about gross private investment? Net private investment is more important. And if firms are boarding up perfectly good factories, that's a loss to Net Investment (analogous to an increase in depreciation). This is deadweight loss, and it need not effect any of the terms in the above identity directly, although it's important to remember that private saving is also a function of private income. Imagine that b/c of rising inventories it can't sell, GM were to just lay off all of it's workers. They'd spend less, yes, but since they'd be making nothing, the workers would be forced to spend out of savings, which would also reduce private investment. Now imagine the gov't comes along and buys the inventory and dumps it in the ocean. Now GM would be out of inventory, so it would take that as a signal to start producing again. The workers, who are now making incomes again, would spend some money & save part of it too. Hence, investment in capital structures could actually rise, depending on factors outside of this simple identity, which alone tells us nothing. (And private investment did rise once FDR increased gov't spending! Let's call it negative crowding out/crowding in.)
Of course, given that Fama is a contestant for both the Nobel Prize in Economics and for the Stupidest Man Alize contest, we can now apply the Squeeze Theorem to the rest of the academic Economics profession to conclude that there's just not much there. Tenured Harvard economist and former Bush CEA Chair Greg Mankiw displays http://www.dimensional.com/famafrench/2009/01/bailouts-and-stimulus-plans.html
the applicability of this theorem well -- though he disagrees with Fama, he can distill no fault in his logic.
Of course, Fama will probably still loses out in said contest to Gary Becker, who says that not only will gov't spending completely crowd out private investment, but that it will actually reduce total output. Can anyone top that for stupidity?
(Update1: Apparently I can come close to topping that for stupidity -- In the initial post I did not realize that Fama has not actually won a Nobel yet... though he has long been rumored to be on the short list. Let's hope not.)
(Update2: Great minds think alike! I see Brad DeLong (not that he reads this) made similar points five hours later!)
The book evidently "gives us a battle plan to re-make America anew, the way the Founders intended - strong, patriotic, pro-family, and unapologetically God-fearing."
The back cover of her book, for example, tells us that the "most important choices of your life are being made for you. They are made by ... politicians ... judges ... and executives in a polluted entertainment industry."
As a liberal, I'm just not sure I could date a right-winger, especially one who is a radio talk-show host filled with senseless babble and actually rails against teaching sex-ed in schools. But that's just me.
Tuesday, January 13, 2009
Here's the memo:
On the other hand, Engel's law implies more money going to the bottom rung is more likely to be spent on basics like housing, eating, health care, and the "good" part of consumption which is more akin to investment...
What do the rich spend their money on? A round of golf at Pebble Beach costs $500. My own mother occasionally goes on golf trips with the super rich -- her super-rich companions booked the Presidential suites, for $900/night, when they could have had regular rooms for $250/night. NFL playoff tickets often eclipse $2000, while the average economics TA makes far less than that per month. Before you give the $100K/year-plus tax cuts, it'd be nice to take care of graduate students, not to mention our nation's teachers, or health care for all of our nation's children...
And, given the severity of the current crisis, I'm just not sold that the political situation necessitates extending the tax cuts all the way up to those making $200K, but I could be wrong... After all, Dems won the election by a landslide; where's our due?
Anyone remember where the last round of tax cuts went?
On the other hand, the New Deal money *must* have all been pissed away... Who uses the Oakland Bay Bridge anymore? (Answer: over a quarter million cars per day...)
I think the lesson should be clear, there is no free market fairy that makes all decisions done by private agents (with no oversight) magically more efficient than government agents (with loads of oversight). Certainly, not all government spending is worthwhile, and I hate government waste as much as the next person, but anyone who has been to a country like India, where the government doesn't have the resources to build roads or clean up the trash knows that government spending can be uniquely valuable.
Friday, January 9, 2009
Among his historic policy transgressions are:
--Espousing market fundamentalist solutions to the Asian financial crisis in 1997, and prescribing raising interest rates and balanced budgets in the face of a crisis, and taking on loans to defend over-valued currencies (something the IMF is incredibly doing once again in Estonia...). This includes helping to force a balanced budget amendment on South Korea.
--Pushing capital market liberalization in developing countries without recognizing the danger of opening up to hot money. Proving this policy is now discredited, Larry has backtracked and said he "never" pushed capital market lib while at Treasury, although his underlings "may have" -- this is an outrageous lie, he *did* push capital market lib and so did those under him, but it proves he now realizes he was wrong and wants to cover this fact up. (See Paul Blustein's excellent book The Chastening.)
--Pushing financial deregulation for the US while at Treasury.
--His research in the 1970s which showed (and presumably he believed) that business taxes are what caused the stock market's dismal performance in that decade. In the model he liked to use, reducing the capital gains tax increases the steady-state capital stock greatly (and, in that model, should also increase the value of equities). Given this, he pushed for reductions in cap gains in the late 1990s, despite the regressive nature of such cuts and that they helped fuel the speculation in equities in the late 1990s. Bush has continued to cut cap gains, but the market just didn't react the way Larry's model suggested.
--Lecturing Gray Davis on how California's regulatory framework caused the California energy crisis. In fact it was Enron traders, a point which was obvious to other economists (hat tip to Paul Krugman -- see his recent blog entry and column during the crisis).
--Telling the Chinese how stupid they are for holding all those US T-Bills, undervaluing their currency, and for imposing capital controls. As it turns out, of course, in the face of a large-scale financial crisis, a mountain of T-Bills tend to come in handy... And having the yuan undervalued hasn't seemed to hurt China's growth much. (See Dani Rodrik's latest: http://ksghome.harvard.edu/~drodrik/papers.html ).
On the other hand, we do NOT! think that Larry Summers is necessarily sexist. In his comments at Harvard, he did not say he thought men were smarter than women on average, he just said that it should be studied whether there are fewer women in the sciences because the tail distributions of the abilities of men and women are different, an empirical point. However, it is clear from his comments that he thinks genetics are more important than culture, and here, too, we think that while he is not necessarily sexist, he is dead wrong. The decision of what profession to choose is deeply cultural...Also, we do not think that Larry Summers deserves blame for the tawdry Shleifer affair (although all economists should read this: http://jboy.chaosnet.org/misc/docs/articles/shleifer.pdf); nevertheless, his colleagues did give terrible advice during the Soviet transition to capitalism. The policy brief he signed which suggested that Africa is "deeply under-polluted" for its level of development was also blown out of proportion, as it is at least possible that letting rich countries send their pollution to Africa for money could be a good idea, however heinous it may sound. And Summers will always retain a special place in our hearts for his infamous smackdown of the worthless RBC model, a paradigm which amazingly dominated the field of Macro for a generation despite its inability to say anything about recessions -- in other words, nobody really thinks that the current crisis was a rational response to a technology shock.
Hence, it is only his record on policy matters which led us to become concerned about Summers' key role in the incoming Obama administration -- he was always on a very short leash. This concern came to a head when details about Obama's stimulus package were announced, revealing key problems in both the size and the nature of the package. The size of the package is the same as that proposed by Martin Feldstein, or roughly $400 billion/year for the next two years, when the output gap requires something in the neighborhood of twice that. The other problem is that the stimulus is laced with regressive corporate tax cuts, which have historically been a favorite of Summers. We once thought that *we* were all Keynesians now... Perhaps not.
In addition, since we are untenured, the blog will remain anonymous. If you are a tenured faculty member, then let us know if you would like to join the ranks of those who support the statement: "President-elect Obama, it is my professional opinion that you would do better without the advice of Larry Summers."
Update: Commenters have taken issue with the pollution in Africa comment. While I see the point, what if the US were to give Africa 6 trillion USD to take all of our trash? Polluting africa is bad, of course, but if it could alleviate starvation and pay for medical supplies and schools, then it would at least be something worth looking into... On the other hand, if rich countries are giving poor countries peanuts in order to pollute, then it's despicable. The morality lies in the details...
Later Update: OK, I'll confess I don't know that much about the background/intent of the Summers Africa comment, but I hereby commit to researching it since that's what's drawn the discussion!