Wednesday, August 31, 2011

PS . . .

This is a recent PS I attached to an e mail sent to my famil.

PS - you might find this interesting . . . or not.

Regardless of the ideological view one holds, a coherent understanding of history can certainly inform the application of that ideology to contemporary challenges. The recent controversy over fiscal and monetary policy and commentary by pundits across the ideological spectrum reflect a breathtaking lack of basic historical knowledge. I suppose I am pontificating as I just graded the finals in my US Economic History class and once again must confront my failure to meaningfully increase a basic understanding of economic history.

This past summer of teaching reminds me that deeply held beliefs will almost always trump history, empiricism and fact (whatever that is). The youtube comment by Steve Horowitz shows an academic who consistently and civilly works to confront these deeply held beliefs with fact.

His youtube above reflects a thoughtful (and I think civil) attempt to correct fundamental errors in history and to open a dialogue that is constructive. I happened to catch Maddow the other night as she struggled to set aside her ideological zest to comment on Mark Hatsfield. While she was able to articulate a part of his contributions to US economic and political history (like Ron Paul, Hatsfield opposed war in a clear and civil manner, often placing him at the margin of his political party). Maddow, like pundits on the right, was unable to resist the gibe jab that undercut her effort to find common ground across different perspectives.

I know some of the extended clan spend time online and these blogs are a wonderful effort to extend the work of civil and engaged discourse:

The Communication Problem is a blog that takes its name from the basic economic problem - how to coordinate diverse and changing expectations, wants, and needs and the impact upon society from addressing this problem or challenge.

CATO - just like The United Auto Workers do not deserve to be condemned and are misinterpreted, so is CATO - this discussion at CATO BLOG is always provocative and inclusive.

The current debate - The New Girl Order is reflective of the topics discussed on a monthly basis, although civility sometimes suffers in the heat of the debate.

Finally, EconTalk, for those of you who are into the podcast world is a must listen each week - much more indepth and diverse than NPR.

AUGUST 8, 2011
Satz on Markets
Debra Satz
Hosted by Russ Roberts

Debra Satz, Professor of Philosophy at Stanford University, talks with EconTalk host Russ Roberts about her book, Why Some Things Should Not Be For Sale: The Moral Limits of the Market. Satz argues that some markets are noxious and should not be allowed to operate freely. Topics discussed include organ sales, price spikes after natural disasters, the economic concept of efficiency and utilitarianism. The conversation includes a discussion of the possible limits of political intervention and whether it would be good to allow voters to sell their votes.

Tuesday, August 30, 2011

Are corporations people too?

Unscripted moments on the campaign trail provide richer fodder than the droning of most teleprompter speeches. Mitt Romney's exchange with an Iowa heckler last week stands out because it's already been turned into a cheeky T-shirt -- sales to fund the Democratic National Committee. Romney couldn't have foreseen that when he started what should have been a predictable stump speech at the Iowa State Fair. Contrary to traditional Midwest hospitality, he was interrupted by loud shouts about protecting social security and Medicare by taxing corporations. Romney's reply: "Corporations are people, my friend." Perhaps too concise an argument for Romney's so-called friend, the Republican candidate continued, "Of course, they are. Everything corporations earn ultimately goes to people."

Monday, August 29, 2011

Deficits, Debt, and Debasement | Scott A. Beaulier and Peter J. Boettke | Cato Institute: Policy Report

In 1977 James Buchanan and Richard Wagner warned about the political legacy of Keynesian economics. "Sober assessment suggests that, politically, Keynesianism may represent a substantial disease," the two wrote in Democracy in Deficit, "one that can, over the long run prove fatal for a functioning democracy." If economic policies are not somehow constrained by rules and supermajorities, deficits are the predictable outcome of democracy. "The bottom line: political capitalism is not laissez faire capitalism," they write. "To continue down our current path is to reinforce the perverse folly of politics that has threatened the viability of the current economic system."

Deficits, Debt, and Debasement | Scott A. Beaulier and Peter J. Boettke | Cato Institute: Policy Report

Sunday, August 28, 2011

Taxing - the rich, the middle and the poor

Boyes responds to the populist view of increasing government revenue by increasing the share of total taxes paid by the richest members of society.

The context of his remarks are important - the rapidly escalating federal budget deficits present a clear and present danger to the economic health and welfare of society. This deficits generate an increasing burden on current and future generations in the form of increasing debt costs. I have required my students this semester to read America the Broke: How the Reckless Spending of The White House and Congress are Bankrupting Our Country and Destroying Our Children's Future. This 2004 book by Gerald Swanson of the University of Arizona is a polemic, but an important and early view of the context that Boyes uses to analyze the scheme to increase taxes . . . eventually on all.

“One day soon, our government will suddenly run out of cash, unable to meet its payments, leaving the United States as bankrupt as any banana republic. We are far more vulnerable than most Americans realize. . . With a debt of $7.3 trillion, if interest rates were to hit the levels we saw 20 years ago, it would take every nickel collected in income taxes just to pay the interest on our existing debt. There would be no money left for defense, or homeland security, or education, or Social Security.

This scenario is hardly fiction. That the United States of America can literally go broke is no longer a fantasy but likelihood—unless we stop the train now speeding us to Armageddon. If we do not get our financial house in order, and soon, our great nation will collapse under the weight of its financial obligations.

I believe we can prevent the catastrophe. But time is short. In the final reckoning, it’s up to us to do what’s needed to save America’s future.”—from America the Broke

The dirty little secret that neither George W. Bush nor Congress are willing to confront—that America’s reckless spending, disastrous deficits, and exploding debt are speeding our great nation to financial ruin.

Imagine a world in which you lose your job because your company goes under, your retirement money disappears, the value of your home tumbles overnight, your bank stops allowing cash withdrawals, and your ATM card is canceled. The price of groceries has risen so fast that you don’t have the money to pay for them at the check-out counter . . . and the country is bankrupt.

That is exactly the future that economist Gerald J. Swanson sees America hurtling toward—unless we rein in our country’s reckless spending. In America the Broke, Swanson, coauthor of the runaway New York Times bestseller Bankruptcy 1995, argues that the United States is on the brink of financial collapse.

Back to the issue of taxes. There are only two alternatives to the current fiscal disaster - reducing spending and/or increasing taxes.

I would favor tax reform rather than increasing marginal rates on any bracket of taxpayer. This reform would include:

1. Elimination of business subsidy. Boyes and I have blogged here analyzing the perverse incentives and consequences of subsidy to the business sector. Elimination of these subsidies would accomplish two important goals - increasing revenue to the state to reduce the deficit and improve economic performance by increasing efficiency.

2. Elimination of individual subsidy - for example the deduction for home interest expense. Elimination of these subsidies would accomplish two important goals - increasing revenue to the state to reduce the deficit and improve economic performance by revealing the cost of consumption.

3. Flat tax for individual tax payers.

4. Elimination of the corporate income tax.

5. Elimination of the ceiling on social security and medicare payroll taxes.

That said, the Mercatus Center agrees with Milton Friedman that the most likely path toward successful fiscal balance is spending cuts rather than tax increases (reform?)

Mitchell shows that a number of other researchers have confirmed that reforms that focus on spending cuts are far more likely to be successful than those that focus on revenue increases. He also demonstrates the consequences of failing to heed history’s lessons.

Friday, August 26, 2011

Michael Spence writes

The overall picture is clear: employment opportunities and incomes are high, and rising, for the highly educated people at the upper end of the tradable sector of the U.S. economy, but they are diminishing at the lower end. And there is every reason to believe that these trends will continue. As emerging economies continue to move up the value-added chain -- and they must in order to keep growing -- the tradable sectors of advanced economies will require less labor and the more labor-intensive tasks will shift to emerging economies.

Highly educated U.S. workers are already gravitating toward the high-value-added parts of the U.S. economy, particularly in the tradable sector. As labor economists have noted, the return on education is rising. The highly educated, and only them, are enjoying more job opportunities and higher incomes. Competition for highly educated workers in the tradable sector spills over to the nontradable sector, raising incomes in the high-value-added part of that sector as well. But with fewer jobs in the lower-value-added part of the tradable sector, competition for similar jobs in the nontradable sector is increasing. This, in turn, further depresses income growth in the lower-value-added part of the nontradable sector.

Thus, the evolving structure of the global economy has diverse effects on different groups of people in the United States. Opportunities are expanding for the highly educated throughout the economy: they are expanding in the tradable sector because the global economy is growing and in the nontradable sector because that job market must remain competitive with the tradable sector. But opportunities are shrinking for the less well educated.

Tax the Rich

According to the Internal Revenue Service, in 2008, those in the top 1 percent of the income distribution, with incomes over $380,000, had an effective tax rate of 23.3 percent. In 1986, a year when the real gross domestic product grew a healthy 3.5 percent, their effective tax rate was 33.1 percent. The argument for increasing taxes on the rich states that if this group were still paying 33.1 percent, federal revenue would have been more than $166 billion higher in 2008 alone. That would be enough to reduce the budget deficit by about 10 percent this year. If the top 1 percent of taxpayers had continued to pay the same effective tax rate they paid in 1986 every year from 1987 to 2008, the federal debt today would be $1.7 trillion lower.
Warren Buffett is one of the strongest proponents for higher taxes on the “mega” rich. If those 400 mega-rich people could be taxed on their earnings at the top 35 per cent income tax rate, it would raise an extra $12bn in taxes. If they could be made to pay 50 per cent that would raise an extra $26bn. Sounds good doesn’t it? But before jumping on the bandwagon we need to inquire about a few things. . What is the effect of such a tax? Will the mega rich or just rich be able to alter behavior so that they don’t pay the higher tax?
If Buffett and other billionaires do not think they are paying their fair share toward government programs, they can voluntarily send the government an additional check. So why would they favor raising taxes on those who make as little as $250,000 a year, an amount that is less than one one-hundred-thousandth of Buffett's total wealth?
Perhaps the mega-rich know that raising tax rates on individuals with incomes of more than $200,000, or married couples with incomes above $250,000, may have no affect at all on the amount the mega-rich pay in taxes. Families with a billion dollars of wealth do not have to earn another dollar of income to maintain their lifestyles. They could hold all of their assets in cash and still be able to spend $20 million a year for the next 50 years on whatever they please. For the truly rich, engaging in economic activity and paying taxes is voluntary in every sense of the word.
But a counter to Buffett’s proposal is that although a billionaire's lifestyle would be unaffected by forgoing all income, the rest of us would lose the value that billionaire's contributions would have made to the economic life of the community. We would never know what start-ups died for lack of venture capital or what businesses failed because of the absence of management skills. Buffett's contribution to the wealth of the American economy through the investments he has made with the assets of his company, Berkshire Hathaway, far outstrip the dollar value of his sizable fortune.
One argument against an increase in taxes on the rich is that it would penalize small business and therefore hurt employment and economic growth. The basis for this claim comes from Internal Revenue Service data. The U.S. Treasury Department found that many of the wealthiest tax filers report some type of non-wage income, such as income from a sole proprietorship, a partnership or an S corporation. The Treasury Department estimated that 75 percent of tax payers in the top bracket reported this type of income. According to IRS data, fully 48% of the net income of sole proprietorships, partnerships, and S corporations reported on tax returns went to households with incomes above $200,000 in 2007.

Although 75 percent reported some business income, how many of these high earners are what most people think of as small business owners? How many of these wealthy taxpayers report that most of their income was from this business-type income? The Tax Policy Center analyzed IRS data looking to see how many wealthy tax filers could say that half of their income or more came from business income. The center found that, among the wealthiest filers -- the top 1 percent -- only 32.5 percent earned more than half their income from business-type income. The percentages for non-wage income were even smaller among taxpayers earning less.
Even if only 30 percent of the rich report that more than half of their income came from businesses, a higher tax on the rich would affect these businesses significantly and would have some effect on those businesses owned or run by the other 40 percent of the rich reporting business income.
The United States has about 1.5 million small businesses, and the vast majority of business owners earn modest incomes. According to the Joint Tax Committee, only 750,000 people – about 3 percent of those who report positive net business income – would be affected by the higher rates. But, the Tax Foundation estimates that the average tax return with business income will report adjusted gross income of $948,414 in 2011. This average-income business could face a total tax increase of $66,979, bringing their federal tax burden to more than $293,000. Higher overhead costs lead to lower profits, fewer dollars for reinvestment and less money for payroll. Thus, millions of workers could be harmed by tax hikes aimed at the rich.
Rather than talk about an increase in income taxes on any group, we should be talking about eliminating the income tax and replacing it with a consumption tax. A tax creates a distortion of resources relative to the absence of a tax. If a tax on income reduces the incentive to create income, that is a dramatic deterrent to a growing economy. A tax on consumption alters the decision to consume or to save. Moreover, the tax is imposed more on those who consume than those who save and more on those who consume more. So in this sense a tax on the rich can be imposed. The rich are likely to spend more.

No matter what type of tax system is used, it has to be remembered that if government can increase revenues and spend more it will. There has to be a limit on the size of government. Government must be reduced until it does only what it was defined to do in the U.S. Constitution.

Thursday, August 25, 2011

The great divergence, the other way around

Dani Ronik writes:

As rich economies' prospects dim under their crushing debt burdens and political paralyses, the world's hope for economic dynamism rests with developing nations. These countries had an exceptionally good decade before the global financial crisis struck. And most among them have recovered quickly.

Check out this picture, which I find quite interesting:

Wednesday, August 24, 2011

Human Action

The current debt "crisis" was anticipated and described by Misses in Human Action:

The traditional tax policy of the age of interventionism, its glorified devices of progressive taxation and lavish spending have been carried to a point at which their absurdity can no longer be concealed. The notorious principle that, whereas private expenditures depend on the size of income available, public revenues must be regulated according to expenditures, refutes itself. Henceforth, governments will have to realize that one dollar cannot be spent twice, and that the various items of government expenditure are in conflict with one another. Every penny of additional government spending will have to be collected from precisely those people who hitherto have been intent upon shifting the main burden to other groups. Those anxious to get subsidies will themselves have to foot the bill. The deficits of publicly owned and operated enterprises will be charged to the bulk of the population.

An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole system of interventionism collapses when this fountain is drained off: The Santa Claus principle liquidates itself.

Monday, August 22, 2011

Regime Uncertainty

Robert Higgs has long argued that the certainty, uncertainty, and psychology affect the economy --in particular, he argues that when the Administration in power attackes business, creates class warfare, and threatens to tax the "rich" or "big business" or to regulate and control business and individual investors, then these people will not invest and the economy will falter. The evidencxe for this is the Great Depression. FDR attacked the private sector, calling business evil and saying that the government is the only solution. President Obama has created the same environment. Those economists arguing for increased spending -- Krugman, Blinder, Feldstein, and othewrs -- are joing the fight. The problem, they say, is too little spending not too much. But think about it. You take money from individuals and churn it through government agenciet and spend it on green industry or ethanol or some other favored government program, how can that increase growth? First, it misallocates resources -- the spending occurs in sectors the free market would not allocate resources to. I find it incomprehensible occurthese economists and many others don't see how illogical their arguments are. It has to occur for one or two reasons. First, these people know they know the answers and no one else does. If only they were in charge. The second reason is that people do not .understand how markets work

Corporate welfare for farmers

Friday, August 19, 2011

The escalating cost of cheating

The "market" for "assistance" in education. This discussion reinforces my view that a significant level of "cheating" is due to poor planning and organization - on both sides of the lecturn.

Thursday, August 18, 2011

Cheating as signalling

Last month a friend and I discussed education as signaling over on Facebook. I was skeptical about the efficacy of public funding for higher education, my friend replied that higher education was valuable for its signalling function, implying that public funding for much of higher education lead to benefits great than cost.

This seems relevant to that discussion.

Written by Panos Ipeirotis

Last Fall, it was my first semester of teaching as a tenured professor. It was also the semester that I realized how pervasive cheating is in our courses.

Read on . . .

As an insider to this segment of society with limited knowledge, I remains skeptical of the efficacy of significant government intervention in the higher ed market.

Tuesday, August 16, 2011

Correlation Doesn't Mean Causation

"Trying to “produce” college graduates from young people who have scant interest in or aptitude for serious academic work won’t accomplish anything."

And, in my view is doomed to . . . more grade inflation and lowered standards of expectation.

Monday, August 15, 2011

Nearly half of all full-time employees at Arizona State University are administrators.

An IBD analysis of data from the National Center for Education Statistics shows that from 1989-2009 the number of administrative personnel at four- and two-year institutions grew 84%, from about 543,000 to over 1 million.

By contrast, the number of faculty increased 75%, from 824,000 to 1.4 million, while student enrollment grew 51%, from 13.5 million to 20.4 million.

The disparity was worse at public universities and colleges, where personnel in administration rose 71%, faculty 58% and student enrollment 40%. Private schools also saw administration and faculty growing faster than student enrollment, although faculties slightly outpaced administration increases.

Administrative personnel are employees who are not engaged in instruction and research. The jobs range from university president and provost to accountants, social workers, computer analysts and music directors.

Tuesday, August 9, 2011

George Soros writes of the Open Society

"Popper showed that totalitarian ideologies like communism and Nazism have a common element: they claim to be in possession of the ultimate truth. Because the ultimate truth is beyond the reach of humankind, these ideologies must resort to oppression to impose their vision on society. Popper juxtaposed these totalitarian ideologies with another view of society, one which recognizes that no one has a monopoly on the truth; different people have different views and different interests, and there is a need for institutions that allow them to live together in peace. These institutions protect the rights of citizens and ensure freedom of choice and freedom of speech. Popper called this form of social organization "open society." Totalitarian ideologies were its enemies."

The remainder of this post is remarkable, both for what is ignored (either willfully or via ignorance) and for the lack of logic.

For Soros to conclude that confidence in markets and individualism has a parallel to the totalitarian regimes of the 20th century is breath taking and disappointing, particularly given the events in Soros' life.

Monday, August 8, 2011

Austrian View of Economic Situation

The following documentary is interesting and puts a rather negative picture on the economy today. It is called "overdose".

My reply to a friend

A friend e mailed to ask my view of a recent Paul Krugman article. My response . . .

Great to hear from you - hope your summer is going well.

Krugman articulates one view (relatively extreme) that argues that government can improve outcomes in society and that the recession of 2007-9 and slow recovery are due to the government: a. acting incorrectly prior to the recession and b. not doing enough during/after the recession. While his view is extreme, it is shared by a minority of economists and reflects a popular believe in the majority of the American public's mind that life can be improved by sacrificing some level of individualism in return for a collectivist or populist control of the economy by the state. This view has its roots in the 19th century progressive movement and, some scholars (Schumpeter, North et al) argue is an inevitable by product of expanding wealth in society. That is, as GDP per capita increases, there is an emergent evolution toward the welfare state based upon popular views of risk and the "responsibility" of the state.

Greg Mankiw and other mainstream or middle of the road social scientists do not have Krugman's confidence (hubris?) in state action - they point to the costs of central planning and to history as a cautionary tale when considering a strong state as a stabilizing force in society. That said, Mankiw et al would suggest that, while confidence in the efficiacy of state intervention has been a partial cause of the current "crisis" in deficits and debt at the federal level, the state can work toward stabilization through consistent and clear actions - for example, using rules rather than discretion in monetary and fiscal policy.

On the opposite end from Krugman would be social scientists who follow in the steps of Hayek and Friedman. They argue that the "knowledge problem" is a constraint that the state cannot overcome and that, in most cases, the discovery activities of individuals acting on their own knowledge to their own goals, will lead to problem resolution far more successful than centrally planned actions. I tend, as you know, to have sympathy with this view - that sympathy is in the sense that Adam Smith used the word in his seminal book - The Theory of Moral Sentiments.

All this said, there is an understandable, albet unfortunate, tendency to rush to the state for help in times of crisis. Bob Higgs has spent a great deal of his career looking at this tendency, I recommend his book Crisis and Leviathan for an accessible analysis of both this tendency by members of society and, more importantly, the consequences of this rush to seek help from the state.

In this piece Krugman, accurately makes the observation:

"The big drag on the economy now is the overhang of household debt, largely created by the $5.6 trillion in mortgage debt that households took on during the bubble years. "

The three points of view I outline above (a clear oversimplification, but useful I think to flush out opposing points of view) might agree on the statement but disagree on what lead to this creation of debt.

I suspect you could summarize Krugman's view of the cause - the alliance between large business and the government.

I would argue that this is an incomplete view. The incentives that lead to individual borrowers to eagerly signing mortgages that were dangerous were a long time in developing and, based to a large extent in my view, on the emergent populist view that shaped their assessements of: a. what would happen to asset prices (the value of their home) b. who would "help" if their was a problem with their mortgage. The help, in the form of a myriad of state actions ranging from Freddie and Fannie Mae, to the community reinvestement act to consumer "protections" provided a textbook example of a bubble that included toxic levels of moral hazard and systemic risk. These preverse and unintended consequences are reflective of the knowledge problem that Hayek articulated and, more importantly, the inevitable result (in my view) when collectivism replaces individualism. Hayek's two essays - The Use of Knowledge in Society and Competition as a Discovery Procedure are available online, accessible to all readers and, in my view very, very helpful in providing information that you could use to evaluate or reevaluate the views of Krugman (and Mankiw and Friedman, for that matter).

Krugman, of course, disagrees and, while he holds a Nobel, it is for work in trade theory, not public choice. For a nuanced view the work of James Buchanan and Thomas Sowell would leave one unsurprised by the 2007-9 recession, the current debt "crisis" and the near future solvency (or insolvency) of entitlement programs.

Krugman, unintentionally, articulates the most important take away from the current crisis as well as reading history when he admits (unintentionally I suspect aligning himself with Hayek)

"The answer is that we don’t know."

Perhaps more than you were interested in . . . but an important topic and question for those of the generations that will follow.



To: "Gregory Pratt"
Sent: Monday, July 18, 2011 6:55:19 AM
Subject: Would Love Your Take

This is P Krugman:

July 17, 2011
Letting Bankers Walk
Ever since the current economic crisis began, it has seemed that five words sum up the central principle of United States financial policy: go easy on the bankers.

This principle was on display during the final months of the Bush administration, when a huge lifeline for the banks was made available with few strings attached. It was equally on display in the early months of the Obama administration, when President Obama reneged on his campaign pledge to “change our bankruptcy laws to make it easier for families to stay in their homes.” And the principle is still operating right now, as federal officials press state attorneys general to accept a very modest settlement from banks that engaged in abusive mortgage practices.

Why the kid-gloves treatment? Money and influence no doubt play their part; Wall Street is a huge source of campaign donations, and agencies that are supposed to regulate banks often end up serving them instead. But officials have also argued at each point of the process that letting banks off the hook serves the interests of the economy as a whole.

It doesn’t. The failure to seek real mortgage relief early in the Obama administration is one reason we still have 9 percent unemployment. And right now, the arguments that officials are reportedly making for a quick, bank-friendly settlement of the mortgage-abuse scandal don’t make sense.

Before I get to that, a word about the current state of the mortgage mess.

Last fall, we learned that many mortgage lenders were engaging in illegal foreclosures. Most conspicuously, “robo-signers” were attesting that banks had the required documentation to seize homes without checking to see whether they actually had the right to do so — and in many cases they didn’t.

How widespread and serious were the abuses? The answer is that we don’t know. Nine months have passed since the robo-signing scandal broke, yet there still hasn’t been a serious investigation of its reach. That’s because states, suffering from severe budget troubles, lack the resources for a full investigation — and federal officials, who do have the resources, have chosen not to use them.

Instead, these officials are pushing for a settlement with mortgage companies that, reports Shahien Nasiripour of The Huffington Post, “would broadly absolve the firms of wrongdoing in exchange for penalties reaching $30 billion and assurances that the firms will adhere to better practices.”

Why the rush to settle? As far as I can tell, there are two principal arguments being made for letting the banks off easy. The first is the claim that resolving the mortgage mess quickly is the key to getting the housing market back on its feet. The second, less explicitly stated, is the claim that getting tough with the banks would undermine broader prospects for recovery.

Neither of these arguments makes much sense.

The claim that removing the legal cloud over foreclosure would help the housing market — in particular, that it would help support housing prices — leaves me scratching my head. It would just accelerate foreclosures, and if more families were evicted from their homes, that would mean more homes offered for sale — an increase in supply. An increase in the supply of a good usually pushes that good’s price down, not up. Why should the effect on housing go the opposite way?

You might point to the mortgage relief that would supposedly be extracted as part of the settlement. But if mortgage relief is that crucial, why isn’t the administration making a major push to reinvigorate its own Home Affordable Modification Program, which has spent only a small fraction of its money? Or if making that program actually work is hard, why should we believe that any program instituted as part of a mortgage-abuse settlement would work any better?

Sorry, but the case that letting banks off the hook would help the housing market just doesn’t hold together.

What about the argument that getting tough with the banks would threaten the overall economy? Here the question is: What’s holding the economy back?

It’s not the state of the banks. It’s true that fears about bank solvency disrupted financial markets in late 2008 and early 2009. But those markets have long since returned to normal, in large part because everyone now knows that banks will be bailed out if they get in trouble.

The big drag on the economy now is the overhang of household debt, largely created by the $5.6 trillion in mortgage debt that households took on during the bubble years. Serious mortgage relief could make a dent in that problem; a $30 billion settlement from the banks, even if it proved more effective than the government’s modification program, would not.

So when officials tell you that we must rush to settle with the banks for the sake of the economy, don’t believe them. We should do this right, and hold bankers accountable for their actions.

Sunday, August 7, 2011

Saturday, August 6, 2011

Simon Johnson writes . . .

The only law that Congress cannot repeal is the law of unintended consequences.

Thursday, August 4, 2011

More thoughts on Keynes and Hayek

In thinking about the role played by Keynes in both shaping economic theory and, perhaps more importantly, shaping beliefs, expectations and hopes it is clear that the post Keynesean "revolution" masks a portion of what Keynes believed to be important about human behavior. Skidlesky writes and summarizes a Keynes piece in the New Statesman in 1939

On the one hand there was the need for planning and organization. At the same time, he the 'profound connection between personal and political liberty and the rights of private property and private enterprise'. He argued that the threat to liberty from the measures he proposed was 'so remote from the first and the next and the things that want doing , that it is not now, and is a long way from being a practical issue'. (vol 3 page 39)

I read this as an awareness of the consequences to liberty from the "Middle Way" that Keynes advocated. In 1939 as one looked across Europe one saw Franco, Mussolini, Hitler, and Stalin. The march of totalitarianism, to Keynes, offered a clear and present danger to liberty and liberalism. It should be remembered that Milton Friedman was later part of the war effort and both Friedman and Hayek recogized the absolute requirement for central planning to advance the war effort.
The real question here is was was to be the philosophy of the post war world, where was the line to be drawn between the state and individual? Keynes and Hayek differed markedly on this important question and the Roberts/Poppa videos capture this difference. However, the videos oversimply the debate and, by ignoring the context tend to shape a view of Keynes that is, in my present way of thinking misleading. Keynes fancied himself a classical liberal, at least at the beginning of his career. The totalitarian threats of the 1930s coupled with the challenges of sustained and seemingly expanding structural unemployment led him to a view of the importance of state action. It is hard to argue against the argument for state planning to oppose forces of oppression and repression.
Skidelsky goes on to assert (vol 3 page 67)

Since Keynes is so often unthinkingly place in the dirigeste camp, it is important to insist that he favoured the fiscal theory of war control. More importantly, he invented the fiscal theory, precisely in order to avoid 'totalitarian' planning. . . . the issue is not whether he was right or wrong, but the spirit in which he approached wartime problems. . . . After a long search, Keynes had found his own point of equilibrium between individualism and collectrivism and he held fast to it. Keyne's fiscal theory was an alternative to inflation as well as physical planning. Indeed, he believed that teh first would inevitably lead to the second. What he called 'totalitarianism' was an inevitable outcome of failing to control inflation in a modern economy-a conclusion strikingly similar to that of Hayek in his Road to Serfdom"

This to me was a new way of looking at the Keynes/Hayek debate and, I think, worthy of thoughtful consideration. The metaphor of line between the opposing forces of individualism and collectivism informs much of the Skidelsky biography and the Hayek/Keynes debate. (67) Keynes steadfastly defended the price systenm and consumer choice. 'The abolition of consumers' choice in favor of universal rationing is a typical poroduct . .. of Bolshevism. . . . I am siezing the opportunity to introduce a principle of policy which may be thought of as marking the line of division between totalitarianism and the free economy.

To me this is both an important connection and distinction between Hayek and Keynes -both sought the "proper" line or balance to preserve individualism and freedom and the context of the actual debate between the two (as opposed to followers) is the raging battle between free and non free forces, a battle that was in the balance. In fact the post WW2 world seemed to suggest a victory by the latter - think geography in 1950. Skidelsky asserts about this debate (vol 3 page 286)

Much can be said on both sides, and Keynes was right to point out thta the policies which took no precautions against slumps were likely to produce 'disillusion' or, worse, hellish revolts against liberal values. (This seems to be borne out by the African experience in the last half of the last century). On the other hand, no one who lived through the 1970s can fail to see a great pathos in Keyne's so English response to Hayek's warning - "Don't worry, things will be perfectly all right here in England, because we are English and not crazy like the Continentals. On this matter, at least, Keynes and Hayek found each other to an honorable draw. The game is not over.

And this is, fortunately true - as we know - the game/debate/argument is not over and, in a free and liberal society will not end. This is a reasonable and ongoing discussion to have and we are inspired to conduct it in a manner as civil and thoughtful as Hayek insisted.

Wednesday, August 3, 2011

Thoughts on Keynes

I completed Skidelsky’s 3 volume biography of Keynes this week. This massive work is useful although far too long and was for me an eye opener. Clearly Keynes is a seminal figure in the evolution of thought and belief in what might be called the middle way (a section in vol. 3) in social organization, the state and individualism. Brilliant, changeable and intuitive, I have found a great deal in Keyne’s life relevant to the debates that shape policy today.

Keynes first major work dealt with probability and his ongoing analysis of risk and uncertainty is a reflection of central concern in social organizations. His awareness of these twin topics and recognition of the limits that they represented was startling to me, given the evolution of Keynsean thought. Skidelsky writes in vol. 1 - “Keynes attack of the Jevons/Edgeworth approach was in line with his general hostility to the use of mathematical methods in both probability and economics. .. . He regarded both probability theory and economics as branches of logic, not mathematics, which should employ methods of reasoning appropriate to the former, including judgment and intuition, and incorportating a wide knowledge of non-numerical facts.”(222)

This was surprising to me, given the current state of the profession and the influence that Keynes disciples have played in shaping the evolution of economics. In fact, this view, if true, echoes the Knowledge problem in Hayek and is a further connection between the two.

A second surprise, although upon reflection I should not have been, was the attitude that Keynes took toward WW1. Keynes considered himself a pacifist and wrote:

I do not say that there are circumstances in which I should voluntarily offer myself for military service. But after having regard to all the actually existing circumstances, I am certain that it is not my duty to offer myself, . . . I am not prepared on such an issue as this to surrender my right of decision, as to what is or is not my duty, to any other person and I think it is morally wrong to do so. (318)

Wow, this is amazing – both the clear belief in individualism and tying that belief to a morality of individualism. If one thinks of the Boom and Bust videos as a reasonable representation of the debate between Hayek and Keynes on the locus of decision making, this passage suggests that the debate is more complex than liberals might think. In fact, Keynes considered himself a liberal, if not 19th century then 20th and later wrote in the General Theory:

The authoritarian state systems of today seem to solve the problem of unemployment at the expense of efficiency and freedom. It is certain that the world will not much longer tolerate the unemployment which, apart from brief intervals of excitement is associated-and, in my opinion inevitably associated with present day capitalist individualism. But it may be possible by right analysis to cure the disease whilst preserving efficiency and freedom. (vol. 2 p 571)

This passage underscores Keynes optimism in the face of very, very daunting current events, what I read as his commitment to freedom and individualism and a recognition of the Schumpterian claim that capitalism lays the seeds of destruction in an emergent pervasive desire for security, social support and social justice. The middle way that Keynes advocated was an effort to preserve the dignity of the individual in the face of the social tradeoff for security. This, to me, is the crux of today’s debate in the developed world, and the balance of public opinion rests in the mirage of social justice and a utolpian belief in abundance. Both of these contemporary beliefs would have been dismissed by Keynes, nonetheless they are real today. Boyes and I have blogged on the dynamic of this belief – that “justice” demands social security, egalitarianism and provision of an increasing array of “public” goods. Keynes would appear to be closer to opposition to these views than support as advocated by contempoprary ideologues on the right or left. Moreover, Keynes would find much to support in Higgs’ analysis of and condemnation of the warfare state. That said, Keynes spent a great deal of time working from the recognition that both the informal institutional support for the state and the dynamic of the warfare state were realities to be confronted and his method of confrontation was pragmatic not ideological. So, the middle way worked to incorporate actions by the state to preserve freedom. I have learned a great deal about the cultural and social landscape of the 20s and 30s from this biography – the threat of totalitarianism is remote to most today – first Italy, then Germany and later the USSR “seemed” to respond to and recover from the Great Depression and presented not only an alternative but a higher order alternative to the decision making of a liberal society.

Concurrent with this deceptive but pervasive “evidence” of the superiority of planning was a change in the informal institutional matrix that Skidlesky describes:
From the start ‘scientific’ economics had been strongly normative. By increasing understanding of ‘economi laws’ it hoped to shift economic arrangements toward the competitive ideal which would maximize the creation of wealth; hence the strong association between 19th century economics and the policy of laissez-faire. Adam Smith and his followers were chiefly preoccupied with the failures of government. Their idea was that government should keep law and order, and get out of economic life.

By the last quarter of the 19th century the mood had changed. The failures of laissez were palpable, the competence and integrity of governments were much improved; the growth of democracy had increased pressure on the state to ‘solve’ or at least alleviate social problems. What Dicy called the ‘age of collectivism’ dawned. (vol 2 p406)

Skidelshy uses “mood” to capture this emergent (and now prevelant) norm, belief or faith. I am not convinced that Keynes supported this view, after all his origins in Victorian England grounded himg in views that, early in his professional life were expressed in free trade, no social reform by the government and a confidence in markets born of his active participation in currency, commodity and equity markets as an investor and speculator. That said, Keynes was keenly aware of this shift in sentiment and the threat represented to freedom, individualism and capitalism by the manifestation of this belief system in the state.

Like Smith, much in what is attributed to Keynes is wrong and this widespread misconception of the philosophy and thought of these to seminal thinkers is based upon a lack of familiarity with their work – I would guess much use of both thinkers has been made by those who have not read the work or who have not contextualized or understood the work.

Monday, August 1, 2011

Federal Workers More Likely To Die Than Lose Jobs

The federal government fired 0.55% of its workers in the budget year that ended Sept. 30 - 11,668 employees in its 2.1 million workforce. Research shows that the private sector fires about 3% of workers annually for poor performance, says John Palguta, former research chief at the federal Merit Systems Protection Board, which handles federal firing disputes.

The 1,800-employee Federal Communications Commission and the 1,200-employee Federal Trade Commission didn't lay off or fire a single employee last year. The SBA had no layoffs, six firings and 17 deaths in its 4,000-employee workforce.

When job security is at a premium, the federal government remains the place to work for those who want to avoid losing a job. The job security rate for all federal workers was 99.43% last year and nearly 100% for those on the job more than a few years.

HUD spokesman Jerry Brown says his department's low dismissal rate - providing a 99.85% job security rate for employees - shows a skilled and committed workforce. "We've never focused on firing people, and we don't intend to start now. We're more focused on hiring the right people," he says.

San Francisco State University management professor John Sullivan, an expert on employee turnover, says the low departure rates show a failure to release poor performers and those with obsolete skills. "Rather than indicating something positive, rates below 1% in the firing and layoff components would indicate a serious management problem," he says.