Saturday, July 22, 2017

Kevin Hassett and Donald Luskin Do Not Under Norwegian Tax Law

Brad DeLong reminds us of Kevin DOW 36000 Hassett second dumbest moment giving credit to Mark Thoma for the original take down of Hassett’s Laffer trick:
The Wall Street Journal says Kevin Hassett has discovered the Laffer curve, but I think these data might say something else ... The blue line is supposed to be the Laffer curve, but this is far from compelling. Since it looks like all that's been done here is to draw a line through an outlier, Norway (an outlier that in other contexts we are told to ignore because it is an outlier, e.g. see below), and since this is clearly not the best fitting line to these data, here's another possibility ... I haven't actually run the regression, but it looks clear to me that revenues rise with tax rates, and the fit also looks better than in the first graph. Toss out Norway, and the fit looks even better
A lot of people had a lot of fun pointing out how dumb this graph was including Kevin Drum:
And one more thing. Just for laughs, take a look at what the Journal’s barmy graph drawing implies: Norway, with a corporate tax rate of about 29%, generates enormous amounts of corporate tax revenue. But then, since it’s the only way to get an upside-down U out of the data, the graph goes nearly vertical. Even the Journal’s editorial writers, normally a pretty barefaced bunch, were apparently too embarrassed about this economic singularity to follow the right side of their graph to its logical conclusion, but we can: at a rate of about 33% corporate taxes produce no revenue at all. An increase of a mere four percentage points destroys tax revenue entirely! Mirabile dictu! A junior high school geometry student would be embarrassed to produce work like this. But not the Wall Street Journal editorial page. Or the American Enterprise Institute, which created it in the first place. They apparently think their readers are too dumb to see what they’re doing.
Of course Donald Luskin tried to defend Hassett’s nonsense. As Kevin Drum does remind us, however, that Norway “generates enormous amounts of corporate tax revenue” even though its corporate tax rate is less than 30%. But this is incomplete as Oliver Milman reminds us:
In Norway, companies drilling for North Sea oil pay a 78% tax rate on income, compared with a corporate tax rate of 28%.
Norway produces and exports a lot oil. President Trump is also hoping we can export a lot of natural gas, coal, and oil. Maybe the right thing to do is to follow Norway’s lead and raise the tax rate on these profits.

Thursday, July 20, 2017

Another Personal Observation On Privatized Highways

Last month I posted a personal observation on Trump's plan to privatize infrastructure, noting especially how in the long run privately owned turnpikes in Virginia ended up in government ownership.  In the comments on that post there was discussion of the Indiana Toll Road, privatized a few years ago.  I have just ridden on it (yesterday), and I shall recount as an anecdote datum my less than pleasant experience, bad enough to make me want to avoid it entirely in the future.

I was driving west on it from Ohio.  I stopped in one of the new service areas to get some pizza.  Fancy roof, but only two eating places, Lagrange in the east.  OK, but nothing great.  I would say road condition about same as Ohio's, but tolls higher, although not as high as in Illinois or Pennsylvania.  Anyway, I saw that I had enough gas to make it to the LaPorte service area in the western part of the state, so did not refill there or at the Elkhart one.  Nowhere did I see any signs or information about any problems with any of the upcoming service areas.

So, two miles before the LaPorte service area on the sign for it was draped a cloth saying the area was closed.  Indeed, when got there, it was torn up, presumably to build a new one like what I saw before, not that big of an improvement.  It was OK for trucks to park there, but no gas.I had 10 miles of gas left in my car. Got off at the next exit to go into  LaPorte to get gas.  There was a machine to take the payment, no attendants,, two machines actually.  One would not take my card. Managed to back out and go into the other one, which took my card, but would not take my credit card.  I did have  cash which it took, but there I am fiddling around while my gas is running low.  Had to go around a closed road to get to LaPorte.  Fortunately I got to a gas station with one mile of gas left in my tank.

On returning following the detours, could not reenter the Indiana Toll Road and had to go further to get onto I 94, but given my experience with it, I was not all that unhappy not to be on it.  Maybe this is just an odd case, but I have to say I was not impressed with how these private owners of the toll road are managing it, not at all an obvious improvement.

Of course, Trump has completely stalled out on doing anything about his infrastructure plan, with even his air traffic controller privatization plan sitting there doing nothing, although, of course, his proposed budget does cut actual ongoing infrastructure projects that will shut some of them down, mostly for non-auto transportation systems in urban areas like Pittsburgh.  When I continue to see commenators talking about how his infrastructure plan might stimulate the economy, I am not sure whether I should laugh or cry.

Barkley Rosser

Tuesday, July 18, 2017

Could The US Default Due To A Complexity Catastrophe?

Definitely.

Front  page story in today's Washington Post by Damien Paletta reports that "Treasury chief hurtles toward fiasco," the fiasco being a failure to raise the US debt ceiling in time to avoid a default.  Trump has declared that Sec Mnuchin is responsible for this matter, which he should be, but somehow has not made a sufficiently definitive statement to keep his former Freedom Caucus big cheese OMB director, Mulvaney, from opining that Mnuchin is an out of it New York finance guy (Goldman Sachs even) who is not well connected in Washington, and he, Mulvaney, thinks that the dumb games he played as a Congressman threatening to default are appropriate for  somebody in charge of all this.  The deadline is approaching, although it might be somewhere between early September and mid-October, but at some point if the debt ceiling is not raised, the US will seriously default, something we have not seen, and I doubt that any deal Mulvaney might propose would get through this dysfunctional Congress.  And the article reports that while Mnuchin wants a "clean raise" before  the Congress really shuts down in August, well, according to WaPo, he does not have the "stature in Washington to press through a vote on a measure" supported by all previous Treasury Secretaries.  Indeed, the article is right that he may not be able to do so, and the US may well seriously default on its debt for the first time, something the gang that Mulvaney has belonged to has declared is no big deal. We may be about to find out if that is correct or not.

In thinking about this I have come to realize that part of the problem is that this is a very complicated issue, one that few people understand, and that this lack of understanding is self-propagating: that few understand it means that there are few who can teach those who do not understand it what it is about. The upshot is that an incredibly miniscule proportion of the US population has any remote idea what all this  is about, so are not  putting any pressure on these loud mouthed Congresspeople to behave resonably. If in fact there is a default and it leads to a global financial crisis that puts the world economy back into a serious recession, well, who could have known that, and who will be to blame?

So let me get personal on how severe the lack of knowledge about this is, which is exacerbated by the fact that few media talk about it at all, or if they do so, it is with massive  ignorance.  So, over the Fourth of July weekend I was with extended family. A niece is a prominent journalist in Washington. Her brother, a nephew, was the top performer in high school on a statewide math test in California.  He is  now a wealthy high level computer game programmer in Silicon Valley.  They asked me if there was a threat of recession, as some other family members were claiming, and I said the most serious near term threat for  such would be a default by the US  failing to raise its debt ceiling, leading to a global financial  crisis.  It became clear that both of these very smart and well-informed people knew nearly nothing about this  issue. If they do not, well, probably less than 1% of the US population does, which makes it all the more likely that full-of-themselves ignorami in the House  Freedom Caucus will be all too happy to put Secy Mnuchin in his place when he comes calling for a "clean debt ceiling increase."

Why is this so hard?  Well, one thing is that few  Americans know, and neither my very well-informed and super smart relatives did, that the US is the only nation in the world to have such a stupid thing as a debt ceiling.  The vast majority of professional economists think it should be eliminated.  Congress effectively decides on this when it passes a budget, and this is just an extra nonsensical conundrum.  It is  a historical arttfact from a century ago, when right after  the 1913 passage of the amendment allowing the personal income tax, the US went into WW I, which was not supported by many in the Congress, the Congress imposed this idiotic debt ceiling to retain control over the budget  during wartime. When the war ended, it was not repealed, and we have been stuck with it since, with the vast majority of  both the Congress and the public thinking it is something sacred and important and stuck in marble, when in fact it was an unfortunate mistake that should have been repealed a century ago.

Regarding what will happen if we default, I  do not know, as that could follow many paths. But a serious catastrophe cannot be ruled out, and if  it  comes to pass it may be at least partly due to how complicated this whole thing has become, with neither the public nor most of  the Congress at all aware of what is involved here.  So, we could indeed end up with a complexity catastrophe, and if we do, let us hope that it is not too severe.

Barkley Rosser

Sunday, July 16, 2017

"Those Of You Who Are Old Enough Will Really Get This"

I am adding yet more  to my most recent two posts where I am complaining about this essentially side remark that Larry Summers made in his commemoration of his late uncle, Kenneth Arrow, in which he reports that at the party celebrating Arrow's Nobel Prize in 1972, Summers's other uncle, the late Paul Samuelson was supposedly "discussing how stupid  Joan Robinson was."  As it is,  I should have added to my quote from his talk in the last post what immediately followed that snide and inappropriate remark.  It is the title of this post: "Those of you who are old enough will really get this."  This was then followed by "And they were discussing the turnpike theorem and the maximum principle and the Hamiltonian and whatever."  After that, Summers then moved on to how they continued to  discuss these matters until all the guests were gone and their wives were waiting there impatiently for them to wrap it up, with Larry himself, then a sophomore at MIT, also waiting so somebody could take him back to his dorm.

I think this additional remark  is also worthy of note for  being inappropriate.  It essentially reinforces the idea that it was perfectly reasonable  for Samuelson to have discussed "how stupid  Joan Robinson was." After all, sufficiently senior insiders would "really get this," the strong implication being that of course Samuelson was right about Robinson, and these wise insiders would agree.

Except, of  course, any truly knowledgeable insiders there, and there may well have been some as some of those involved in the Cambridge capital controversy, particular Eytan Sheshinski, who was specifically mentioned in another part of Summers's talk  and who has long been based in Israel, would know  that Summers was being very misleading, that whatever Robinson's level of intelligence,she and her allies in Cambridge, UK had won the debate, the controversy, with Samuelson having admitted that they had and subsequently changing his line about the appropriateness of using the concept of aggregate capital, even if  the rest of those at MIT, especially Robert Solow,  simply ignored this and continued on their merry way using the concept, even though Solow himself showed it be very weak in explaining anything about economic growth.  In any case, few grad schools even teach about this controversy anymore  while continuing to  shove aggregate neoclassical production functions down the throats of unwitting grad students, hence Summers himself recognizing that one needs to be "old enough" to know to what he was referring to when he in effect inaccurately made it look like Samuelson had legitimate grounds for his snarky remark.

In discussing these two earlier posts in comments over on Economists View, RGC linked to the Wikipedia entry on all this. A curious tidbit near the end of that Wikipedia entry on the Cambridege capital controversy is that it quotes one of  the participants, Edwin Burmeister, in 2000 stating that he and Leland Yeager in a 1978 Reply had admitted that assuming smooth substitutability of factors did not  eliminate the possibility of capital-reversing. However, the 1978 cite does not appear in the References.  As it was, it was in Econoimic Inquiry and was a reply to my "Continuity and Capital Reversal: Comment," which had appeared in the Jan.1978 issue of Econoimic Inquiry, which was on a 1976 paper by Yeager (which had won a prize) in Economic Inquiry on capital theory.  Yeager had made the false claim that such smooth substitutability would eliminate those annoying capital theoretic paradoxes in a properly formulated Austrian model.  I showed that he was wrong, and he and Burmesiter admitted it in their Reply to me (they were both at UVa at the time while that was my first year at JMU).

Yeager's 1976 paper in Economic Inquiry was "Toward Understanding some Paradoxes in Capital Theory."

J. Barkley Rosser, Jr., "Continuity and capital-reversal: comment," Economic Inquiry, 1978, 16(1), 143-146.

He and Burmeister's Reply (Yeager first coauthor) was "Continuity and Capital  Reversal: Reply," Economic Inquiry, 16, 147-149.

Barkley Rosser

More On Larry Summers Distorting Intellectual History

I would have included what follows in the previous post, but was afraid of putting too much into one post.  So, a bit more.

Here is the precise quote from Summers's talk about the conversation between Ken Arrow and Paul Samuelson on the evening of the celebration in 1972 in Cambridge, MA.

"Almost everybody left and Paul and Kenneth were discussing turnpike theorems.  Kenneth was discussing aspects of Pontryagin's maximum principle.  Paul was discussing how stupid  Joan Robinson was."

So somehow Larry Summers thought that it was appropriate at this ultimate commemoration of Ken Arrow at the Tel Aviv Institute for Advanced Studies to pull out of what was reported to be a very long discussion that had their wives getting quite impatient, and which Larry himself noted was, well, the two Nobel prize winners in the room going on and on as I am sure they did about all sorts of matters, many of them highly mathematical, that Larry decided to quote as the one contribution by his other uncle, Paul Samuelson, this snide remark about Joan Robinson, which looks pretty ridiculous and hypocritical in light of his humiliating admission only six years earlier that this "stupid" Joan Robinson had been right and he had been wrong.

Let me add some not so well known further weird details about all this.  The first is that after Paul Samuelson walked down Mass Ave from Harvard to MIT after the anti-Semites at Harvard refused to hire him there, in the first year that he was in charge of admitting potential grad students at MIT he rejected his future quasi-brother-in-law* for admission to the grad program, yes, rejecting Kenneth J. Arrow, right up there in stupid decisions along with approving of that incorrect paper on the surrogate production function by various of his grad students in the QJE that led him to  confess about the "foundations of sand" upon which economics is supposedly based.  (Among those accepted in that class instead of Arrow was Lawrence Klein, a future Nobel Prize winner and Samuelson's first PhD student.)

Yeah, pretty embarrassing. As it was in the end, Samuelson was more worried about Arrow-Debreu(-McKenzie) general equilibrium theory, which he did not do, than he was about Robinson and the Cambridge capital theory controversies, and so he hired Duncan Foley, who got his PhD from Herbert Scarf at Yale, to come to MIT and help him teach grad micro  theory there. Duncan did  that, later going to Stanford and falling into heterodox Marxist sin and not getting tenure there. But Samuelson got his  new orthodoxy, which was taught to  people like Krugman and Akerlof and Varian, and  others, establishing neoclassical orthodoxy, although it still lacked game theory.

Regarding Arrow and the Cambridge capital theory debates, to the best of my knowledge, he never said a word about them.  He coauthored a famous book on general equilibrium with Frank Hahn in 1971, with Hahn playing a defender of neoclassical theory, although granting much to the Robinson crowd.  That Samuelson's defense was to retreat to heterogeneous capital being the true way to go is ultimately profoundly ironic, given that he rejected his future quasi-brother-in-law for entrance to MIT's grad program, the general equilibrium guy whose model was ultimately totally decentralized..

In any case, Summer's tossed-off quote from Samuelson looks really shameless, aside from being historically seriously intellectually misleading. Why did he do  this?  I do not know, but it is shameful.

*The parents of Lawrence H. Summers both worked at the Philadelphia Fed, with his father also at U. Penn, and the inventor of the concept of PPP international measurements. His mother,Anita, was the sister of Kenneth J. Arrow, and his father the brother of Paul A. Samuelson.  His father, Robert changed the name from Sanuelson to Summers in an effort to avoid anti-Semitism when he arrived in the US .  Robert kept it, but Paul decided to retrieve the original name, which is why Larry is Summers rather than Samuelson.

Barkley Rosser

Larry Summers Reports That In 1972 Paul Samuelson Complained About "How Stupid Joan Robinson Was."

Ohmigod, he really did this. At the Institute for Advanced Study in Tel Aviv, during a major conference honoring his profoundly wise and honorable uncle, the late Kenneth Arrow, Larry did this. The vast majority of his talk is an outstanding discussion of Ken Arrow as an economist and a person, full of interesting details, all leading to the conclusion that his uncle was both one of the most brilliant economists who ever lived as well as a deeply wise,  personable, morally incorruptible, and all but impeccable as well as just a plain nice guy.

I did not know Ken nearly as well as him, of course, but  all that I ever saw of him, as well as everything I have heard of him personally through my sources, completely supports this.  To the extent he had noticeable faults they were those of an absent-minded professor who is also  a genius.  He paid no attention to obvious simple things.  He was out of touch with various mundane realities, sometimes embarrassingly so.  I shall add a detail not  in Larry's account that I have from a primary source.  In his old age he would sometimes wander the halls of the Stanford econ dept with his fly unzipped. Nobody ever suggested or remotely thought that there was any ill intent in that.  It was like Joe Stiglitz before he became a big star, tying his shoelaces together, something a distracted and brilliant person far beyond anybody around him would do out of absent-mindedness, although Arrow was far beyond Stigitz intellectually and historically, not even close.

So let me deal with the odd matters where on such an august occasion Larry made such an ass of himself.  One is a matter of debate, and he put it out there: he and Arrow disagreed with how the post-Soviet transition should be handled.  He recognizes that Ken disagreed with his policy as Treasury Secretary under Bill Clinton in the mid-to-late 90s about how to deal with the former USSR.  He approved AID funds for Andrei Shleifer and a few others to "assist" in the transition process there, which ended up with Harvard University paying out over $22 million to end a suit by the US Treasury Dept against Shleifer for his conduct there. Summers's attempt to cover for Shleifer, involving him lying in an open meeting to the senior members of the Harvard faculty was the bottom line on why Larry was fired from being Harvard's president.  Unsurprisingly, his wise uncle Arrow knew better, but, of course, Larry did not remotely tell the story of what went down there, implying that Ken was somehow unwisely out of touch with US policy as determined by him.  (Dave Warsh has written decisively on this matter.) Ooooooooooooooog.

Which brings us to this astounding and utterly despicable bit about Joan Robinson and his other uncle, the late Paul A. Samuelson.  So the bottom line outcome of the Cambridge capital theory debates as they came to a head in 1966 in the QJE was that Samuelson's effort to  paper over the critique about aggregate neoclassical production functions coming from Joan Robinson and Piero Sraffa was wrong.  He admitted it in his "Summing Up"paper in the fall 1966 issue of the QJE when such figures as Garegnani and Pasinetti showed that the attempt to dismiss the general presence of capital theoretic anomalies, more precisely, the general presence of non-monotonicity  in the steady-state relations between the rate of profit and level of long term per capita consumption implied that "the foundations of economic theory are based on quicksand."

The bottom line is that he admitted he was wrong in his claims about the "surrogate production function," and that Joan Robinson and Piero Sraffa were right.  In many later publications he maintained this position.  Indeed, when I first met him personally in the early 70s and confronted him with all the details of the Cambridge Controversies in the Theory of Capital, he admitted that Cambridge, UK was right.  He completely disarmed me at that point, of course.  Yes, Joan Robinson and Piero Sraffa were right.  Capital is only meaningfully discussed as being heterogeneous, ironically a position that Hayek came to before he abandoned the topic.  What could I say?

Oh, but now we have his nephew in the venue of honoring his other uncle, the deeply impeccable Kenneth Arrow, reporting this snide wisecrack from Paul Samuelson.  I have no doubt that Paul Samuelson made the remark, frustrated undoubtedly as he was with this most serious intellectual defeat of his entire (and very long) career.  The occasion was a party celebrating Arrow's receipt of the Nobel Prize in 1972 at a point in time that the only other US  Nobel recipient was Paul Samuelson. They were discussing all kinds of mathematical issues long after all the guests were gone and their  wives were bored, and here we have Samuelson making inappropriate and nasty remarks about the woman who intellectually humiliated him. But somehow Larry Summers decided in his remarks on Ken Arrow at this very serious and offical commemoration to ever so quietly slip this utterly unjustified jibe at Joan Robinson in.  Really, this is shameful.

Barkley Rosser

Wednesday, July 12, 2017

Comparing Companies to Nations

Asher Schechter raises a good point in How Market Power Leads to Corporate Political Influence but this comparison is troublesome:
In 2016, the advocacy group Global Justice Now published a report showing that 69 of the world’s largest 100 economic entities are now corporations, not governments. With annual revenues of $485.9 billion, Walmart topped all but nine countries.
GDP is a value-added concept – revenue is not. So what is the right metric? Walmart may have had this much revenue but its pretax income was only $20.5 billion and its operating income was $22.8 billion. Profits understate value-added and since Walmart has over $100 billion in operating expenses (think all those workers surviving on $9 an hour), Walmart’s gross profit is likely the right metric to compare to the GDP of nations and this figure in 2016 was $124.6 billion. So yea – it is a mega corporation but its value-added does not put it in the top 10 of governments.

Tuesday, July 11, 2017

Was Thomas Jefferson A Monstrous Rapist?

It is quite likely that I shall be on the receiving end of some strong opprobrium for this post, but, well, here it goes anyway.

So, Shaun King in the New York Daily News in an article being spread around the internet has accused Thomas Jefferson of being a "rapist" (in the article headline) and "monstrous" in the body of the article for his relationship with his slave, Sally Hemings, who bore him six children, with her and them not ever being freed by the in-debt Jefferson.  Much of the article is accurate, including that last point, as well as that he owned more than 600 slaves (sorry, having trouble linking to article itself).  The main point is that because he legally owned her she had no ability to consent or not consent, so therefore any sex between them was rape, indeed, monstrous rape, with in fact it appearing that this all started when she was about 14, so adding in by current standards statutory rape, although that point was not made in the article. 

I would contend that the correct point in the article is that slavery was itself a monstrous system, and that anybody trying to defend it because some slavemasters were not as cruel as some others is unjustified.  It cannot be justified.  It was monstrous.  And, indeed, the nature of it profoundly morally polluted all interpersonal relations that occurred within it, including sexual ones.

Well, I would say that we do not know whether or not she consented or not. Those pointing out that she could not refuse are, of course, correct.  But that does not mean that she did not consent.  There is a parallel, although less so, with ongoing situations where male bosses impose themselves on female subordinates, where the surbordinate may really not be able to give up the job because of economic reasons, needing to support a family, no alternative jobs available. OK, this is not as bad as slavery, but it is also very similar.  Yes, that is now illegal, but we call in sexual harassment, not monstrous rape, with rape still involving a clear unwillingness of the person supposedly being raped.  In the case of Sally Hemings, we simply do not know,

Let me note a possible alternative view on what happened between them, although this may not be true, and Jefferson's failure to free her does not speak at all well of him.  None of this is mentioned in Shaun King's article.  So, when Jefferson (TJ) took Sally Hemings (SH) with him to Paris when she was 14 and he became ambassador, he was 44.  This is noted in the article, hence, of course the further statutory rape aspect.  But what King left out is that at the time TJ was a widower and alone.  Furthermore, the really important detail, SH was the half sister of his dead wife, with both of them sharing the same father.  Now today we consider all of this not only to be monstrous, but an abomination, really horrendous.  But at the time, it was not at all uncommon, quite widespread in fact.

So it is not at all impossible that TJ himself fell in love with this slave who so reminded him of his dead wife, and she may well have been sympathetic and understanding and not at all in a mood to resist or reject him, in fact, the feeling may have been mutual, although we shall probably never know.  Now at this point somebody might say, "well, why did he not do the right thing and free her and marry her?!"  There is a very simple and obvious reason.  It would have been against the law.  Miscegnation was outlawed in Virginia in the 1690s and that law would remain on the books until a half century ago when the SCOTUS famously overturned it in Loving versus Virginia, the ruling that basically ended all anti-miscegenation laws throughout the US.  Maybe he was just a monstrous rapist, but it is also quite possible that they were both oppressed by this law and system where they could not do what they really wanted. 

So, he had to cover it up, although one can certainly ding him on his hypocrisy in certain writings that are not favorable to African-Americans.  But then we know that for him, he was deeply hypocritical, the slaveowner who wrote all those stirring words in the Declaration of Independence that would later by used by civil rights leaders like Martin Luther King, Jr. to advance their cause.

Barkley Rosser

Friday, July 7, 2017

Here is a Little Economics Lesson

Here’s a little economics lesson: supply and demand. You put the supply out there, and demand will follow. -- Rick Perry, U.S. Secretary of Energy
While the media is having fun at the expense of Secretary Perry's asinine "economics lesson" it is worth pointing out that the very same publications that ridicule Perry perpetually peddle the exact same theory under the guise of "debunking" the imaginary lump-of-labor fallacy. Here is The Economist from yesterday telling its readers that the demand for goods and services is infinite:
By the 1990s governments and employers realised they were making pension promises they would not be able to keep. The idea that there is only a finite number of jobs to go round—the "lump of labour"—was more widely exposed as a fallacy. It became fashionable to argue that "we must work till we drop."
Just for the record, the number of jobs to go round is indeed finite. The demand for goods and services is limited by the funds and credit available to consumers to purchase them and the time available to consume them. Those funds and credit are, in principle, limited even though those limits are, in practice, quite malleable and difficult to pinpoint. Expansion of credit beyond those limits invariably leads to collapse when debt loses its "credibility" -- which is to say the reasonable expectation that the debtor can continue to service the debt.

Perry may be a total fool but he is only parroting what he has been taught by... "economists."

Thursday, July 6, 2017

Did Kevin Hassett Ever Hear About the Solow Growth Model?

Why did Brad DeLong dig up some 2007 nonsense by Kevin DOW 36000 Hassett?
When Kenneth Arrow was awarded the Nobel Prize in Economics in 1972, one of the contributions the awards committee cited was his miraculous “impossibility” theorem. Decades from now, Arrow’s theorem, originally drawn in his doctoral dissertation, will be viewed as the 20th-century idea that best anticipated the 21st century. While mathematical in origin, the impossibil¬ity theorem is simple to describe in words: A government is really just a mechanism that makes collective decisions for a large number of cit¬izens who have different preferences. I might want to spend our tax dollars on dog parks; you might prefer more police. The government’s job is to work it out.
I guess by now you may be wondering where this is going. It seems Hassett is making a case for dictatorship based on stimulating economic growth:
An organization called Freedom House rates the level of political freedom of the world’s nations on a scale of 1 to 7, with 1 the most free. For example, according to the 2006 sur¬vey, countries like the United States and Italy are rated 1, while Singapore is rated 4.5, China and Saudi Arabia 6.5, and North Korea 7 ... nfree China had a growth rate of 9.5 percent from 2001 to 2005.
By contrast, the U.S. growth rate averaged only 2.5%. So much for the Bush boom! Then again – U.S. per capita income was considerably higher than that of Chinese per capita income so would not one expect higher Chinese growth – assuming one bothered to have learned the Solow growth model?

Monday, July 3, 2017

Dean Baker v. Paul Krugman on Trump’s Tariffs

Paul Krugman goes after Trump on his trade war agenda, which alas prompts Dean Baker to go holier (more progressive) than thou on Krugman. While there are passages where Dean is making sense, some of this is bait and switch in my view.
This prospect has many folks, including Paul Krugman, terrified. I don’t share his fear.
Not only is Paul not terrified, Dean later notes that high tariffs on Chinese goods such bad policy that he might be terrified. Can we stop we these cheap shots? Here is the basic underlying premise of Dean’s substantive comments:
I should also say that tariffs are not my preferred way of dealing with the country’s trade deficit, which I do consider a problem. Anyone who thinks secular stagnation (i.e. not enough demand in the economy) is a problem should believe the trade deficit is a problem. If the trade deficit were 1.0 percent of GDP rather than 3.0 percent of GDP we would have been approaching full employment many years ago.
In other words, Dean is assuming we are not close to full employment so we can go all Keynesian here. Look, I agree we are not at full employment so I will go all Keynesian too. If Dean is suggesting Paul does not share this view when we are below full employment, he is not being honest with his audience. And yes I know some think we are at full employment right now. Can we simply say these folks are wrong? Dean continues:
But the normal mechanism for reducing a trade deficit is an adjustment in currency values. This means that the currency of the country (the United States) with the deficit falls and the country with surplus (much of the rest of the world) rises. When the dollar falls in value relative to other currencies, U.S. made goods and services become more competitive internationally. That will lead to more U.S. exports, and fewer imports, bringing trade closer to balance.
Not disagreement here or from Paul I would presume. But now Dean goes a bit off the rails:
This adjustment in currency values has not taken place primarily because foreign governments have bought up massive amounts of dollars. This is partly as a reserve currency to protect themselves against financial crises.
Does Dean really think we are in a world of pegged exchange rates? Maybe China was doing currency manipulation a decade ago but they are not now. The main reason that the dollar is too strong is that the ECB is adopting easier monetary policies than we are. Dean notes that Trump has finally abandoned this currency manipulation nonsense and is going for trade wars. Of course the folly of both trade wars or currency manipulation was exposed by Joan Robinson in 1937 when at least some countries were under a pegged exchange rate regime. But I challenge Dean to think about tariffs under floating exchange rates. If we adopt Trumps tariffs, the dollar would further appreciate hurting export sectors even if it helps the favored import sectors. Dean to his credit wants to talk about the distributional aspects of all of this but he needs to address what Paul wrote:
the tariffs now being proposed would boost capital-intensive industries that employ relatively few workers per dollar of sales; these tariffs would, if anything, further tilt the distribution of income against labor.
I’m sure Dean has heard of the Stopler-Samuelson theorem which in this application would imply higher profits and lower wages. So explain to me – how is Dean being more progressive than Paul on this issue?

It Is Monday, And Robert Samuelson At The Washington Post Is Bashing Social Security Yet Again

Yet again.

I grant that he did not do  it at length or present a lot of clearly incorrect nonsense.  But bash Social Security he did, using an old ruse to do so, combining it with Medicare to invoke a long term deficit danger due to the two of them together, when in fact it is well known that it is the Medicare part of that projection of future spending that leads to all the scary looking deficit numbers, not the Social Security part.

Most of the column by Robert J. Samuelson today,"Everybody's mad at somebody," is a lament about political polarization in the US today, and the obnoxious effect this has policy making.  Fred Hiatt has a similar column, "Trump's wasted opportunity," although I would say that for once Hiatt avoided saying anything too silly, noting possible political compromises on a carbon tax, immigration policy, and tax reform, that might have been possible if Trump had been willing to be a nonpartisan leader, but that look unlikely to happen given his descent into cheap partisanship, as well as his general ignorance and incompetence.  Most of Samualson's column deals with past history of compromises made and how we got to not doing that anymore. However, his misguided statement on Social Security appears in a single paragraph, which I shall quote in its entirety now, regarding supposed compromises or issues that need compromising that are not likely to be.

"To take two familiar examples: The Republican promise to repeal and replace Obamacare while also  reducing premiums and expanding coverage was never possible.  It was make-believe. Similarly, the Democratic refusal to deal with the escalating costs of Medicare and Social Security is crushing other worthy government programs - a strange position for a pro-government party."


So here is RJS back to  playing the role of WaPo Very Serious Person, or whatever, calling for  a compromise between the supposedly equally unwise positions of  the two parties.  But, the hard fact is that his analysis of the impossibility of the GOP position is completely accurate.  He falls down when he gets to the Dem side.  Again, there is a rising trend of medical care costs, which affects Medicaid as well as Medicare. If he had replaced Social Security with Medicaid, he would have been much more accurate, and clearly we need some sort of program to get rising medical care costs under control

But throwing in Social Security there instead of Medicaid (which the GOP is trying to cut without cost controls, just throw people off) as part of their Obamacare repeal and replace, muddies the waters, although it fits in with the longstanding campaign by the WaPo ed board to slash Social Security. And it does have RJS back on his regular Monday spot playing that old game, even if  he did not make too much of a silly fuss about it this time.  But some of us have our eyes on him, and will call him out when he pulls this nonsense, when we catch him. And he was at it again here.

BTW, Happy Fourth of July, you all.

Barkley Rosser

Friday, June 30, 2017

Sandwichman in the FT

Financial Times: "The minimum wage wars are heating up: A new study fails to prove its claim that Seattle wage floor hurts workers" by Martin Sandbu, at Free Lunch on FT Alphaville
First, the numerical result struggles to pass an intuitive “smell test”. As the Angry Bear blog [cross posted at EconoSpeak!] points out, employment in Seattle was booming throughout the period: average wages increased by 18 per cent (!) in the time covered by the study; as did the number of hours worked at all wage rates. It is important to note that the researchers have data on jobs, not on individual workers — so even if there are fewer low-paid jobs than before, it does not follow that workers have lost as many jobs rather than moved into better ones.
...

Fifth, there is a simple arithmetical issue with the methodology. If "low-paid" is defined as below a fixed threshold wage ($19/hour in this study), higher average wage growth in one group relative to an initially similar control group will necessarily take more people out of the low-wage bracket. Such wage bracket creep means that the higher wage growth will "cause" a "loss" of low-wage work through mechanical arithmetics even if nothing causal is happening (indeed even if everyone stays in the same job).

Thursday, June 29, 2017

Muhammed Bin Nayef Bin Abdulaziz Al Sa'ud Confined To His Palace

In Jidda, according to the New York Times today.  So the story about the now deposed 57-year old former Crown Prince of Saudi Arabia and former Minister of the Interior, Muhammed bin Nayef (MbN), putting out a video supporting his own removal appears to be phony propaganda.  The Saudis instead have been broadcasting a video of the new Crown Prince, 31-year old Muhammed bin Salman (MbS) kissing the hand of (MbN).  Presumably he did that back in the day when MbN was the Crown Prince and MbS was his supposed loyal deputy. We have no video of MbN kissing the hand of MbS.

As it is, the story also reports that when MbS's elevation was announced, MbN returned to his palace to find his guards replaced by ones loyal to his successor.  He and his daughters have since been confined to the palace and also forbidden to leave the country, although the latter would seem to be impossible if they cannot leave the palace. 

MbN has been replaced as Minister of the Interior by his nephew, Muhammed bin Saud bin Nayef, whose father is governor of the Eastern Province.  Reportedly US intelligence officials are "outraged" at this, having worked long and well with MbN, who was reportedly the key figure behind squashing al Qaeda in Saudi Arabia,  He is viewed by these people as very competent, and his successor has apparently no experience at all in the area.  Wonderful.  But these people are constrained from speaking openly because of the clear support by President Trump and his son-in-law, Jared Kushner, of the elevation of MbS, as well as his aggressive warmongering in Yemen, against Qatar, and also against Iran.

Of course, we have also seen the spectacle of SecState Rex Tillerson repeatedly making it clear that he at least does not support the diplomatic and economic moves against Qatar.  SecDef Mattis has laid lower on the matter, but has also made it clear that the US intends to maintain its major CENTCOM air base in Qatar and is engaging in actions such as selling Qatar fresh fighter jets that go completely against the Saudi-led move that has been pushed by the warmongering and irresponsible new Crown Prince, Muhammed bin Salman, so stupidly supported by our lunatic president.

In any case, the confinement of Muhammed bin Nayef to his palace suggests that not only does he not accept his double demotion, but that King Salman and his pushy but apparently incompetent son are afraid that all this may not go over all that well with other senior members of the royal  family, so MbN must be kept out of public attention, although confining him like this might back fire, just as the failed efforts to militarily escalate in Yemen, not to mention to isolate Qatar, appear to be doing.

Oh, King Salman has also now appointed another son, 28-year old Khalid bin Salman, to be ambassador to the US.  Let us hope he is not as gonzo off-the-wall as his brother.

Oh, and on the matter of the late Hassa bint Ahmed al-Sudairi, mother of the current king, I have been unable to find when she really died. The source for the Wikipedia entry and pretty much everything else out there readily accessible claim that she died in 1969 is a 2005 article in the Daily Telegraph, with no identified author, on the death of her most powerful son, the late King Fahd.  Deep in the article his mother was mentioned, along with the claim she died in 1969. But I know from primary sources that she was alive much later and running the country through her sons, whom she demanded regular meetings with and complete obeisance to her wishes.   I checked the authoritative book from 1981 by Robert Lacey, The Kingdom. He reports on how Abdulaziz went for her as a child and first married her when she was 13.  She had a son for him, Sa'ad, who died early, after when Abdlulaziz divorced her, so she married his brother, Muhammed.  But Abdulazis was in love with her, reportedly beautiful as well as strong-willed, and he later made Muhammed divorce her, although she produced sons for him, and he remarried her, keeping her as a wife until his death. It was during this second marriage that she produced the Sudairi Seven, one of whom, Salman, is now king.  Lacey does not report on her having died in his 1981 book.

Barkley Rosser

Arithmetic is Hard: Wage-Bracket Creep

There has been a lot of very good critique of the methodology of the University of Washington's study of the minimum wage increase in Seattle. However, I want to repeat and emphasize a very simple point that jumps out.
A static low-wage cutoff point, whether it be $19 or $100, automatically reduces the size of the treatment group (Seattle) if wages in the treatment group are increasing faster than the wage of the control group.
This is not erudite statistical methodology. This is simple arithmetic. If the wages in the treatment group increase at a higher percentage rate than the wages in the control group, more workers are lifted above the $19 threshold in the treatment group than in the control group.  This is true if the treatment group and the control group are otherwise absolutely identical. This is what I call wage-bracket creep. The extremely simplified example below shows how this looks, the yellow cells represent workers whose jobs and hours would be "lost" (to the study) as they pass the $19 threshold:


See how much worse off the treatment group is than the control group? The yellow cell occupants haven't lost their jobs, they have simply been excluded from their respective groups because their wage now exceeds the static cutoff amount.

Of course, I wondered if the study authors could be making such a simple arithmetic mistake. So I reached out to one of the authors, who generously replied but appeared to confirm that they relied on a static threshold. I say appeared because some of the replies were, shall we say, "ambiguous" but did not disclaim use of a static threshold when I sought explicit confirmation or denial.

Counseling Politics

Bear with me.  I’m going to try out an idea that may be completely off-base, or maybe not.  I would very much like to hear what you think of it.

When I was young, long ago, organizations sometimes employed a few counselors or advocates, people whose job was to help clients or other members of the public navigate the bureaucratic tangle of rules, forms, preconditions and other procedures that often stood between them and and the benefits they sought to obtain.  A hospital, for instance, might employ a patient advocate who could advise how to access care that, in principle, ought to be available to all.  When I was an undergraduate there was a small advising office at my university that helped students figure out how to complete their requirements and get the services and support they needed.

I have the impression that, in the last few decades, this job category has rapidly expanded, not only in the number of its practitioners but also the scope of their assignment.  This trend has attracted a lot of attention in higher education, where counseling has expanded at the expense of teaching, at least in its increasing command of limited budgets.  Other social service organizations have turned to counselors, advocates, advisors and similar sorts in increasing numbers.

And counseling has taken on a new ideology, a particular way of defining the set of problems it addresses and the forms solutions should take.  The old, narrow understanding was that people often lacked knowledge of available resources and the procedures for accessing them.  The solution was conveying the relevant information or maybe even changing the rules.  Many counselors still practice this art.  But there is also a new view that the core problem is disempowerment, a psychological condition that prevents people from solving their own problems.  The solution is (of course) empowerment via facilitation whose purpose is to invoke a sense of agency on the part of clients, so people can make decisions they feel comfortable with.

The old view of counseling located the problems of this world in institutions—their complexities and irrationalities.  The new view identifies the core problem as a need for a different type of consciousness.

Now take a further step: suppose this ideology centered on the transformation of consciousness has spread its influence widely through our culture.  One marker might be the distinctive language that “counselorship” employs.  I haven’t investigated the matter quantitatively, but my impression is that the phrase “advocate for” has steadily displaced “advocate” in a wide range of uses in recent decades.  Once upon a time, one advocated policies and occasionally, if one were in the counseling trade, one advocated for a client or group that needed support.  Roughly speaking, if you were for the means to achieve a goal, like a law or policy initiative, you advocated it, and on those rare occasions when you were speaking on behalf of particular human beings (who are ends in themselves) you advocated for them.  But now most English speakers are advocates for exclusively: they advocate for lower or higher taxes, fuel efficiency standards, whatever.  Counseling language has taken over.

Perhaps the counseling perspective has begun to transform politics as well.  If so, we would see a tendency to redefine problems away from the discussion of particular laws or procedures and toward new mindsets/paradigms/discourses/consciousnesses that, by empowering the oppressed or aggrieved, constitute in themselves the objectives of political action.  According to such a perspective, the problem of climate change, to take one example, is not explained by quantitative accounts of the carbon cycle and fossil fuel releases, but as stemming from a failure of consciousness.  People have been disempowered by false conceptions of the true costs and benefits of consumption, their relationship to nature, etc., and “solving” the problem must take the form of transforming consciousness along these dimensions.

What I’m trying to understand is this: I could agree that altering consciousness would be important if it were part of a thought-out political strategy.  Imagine the argument went something like, “if we change the consciousness of x% of the population, they will vote for politicians who will enact laws that restrict carbon extraction, and so on”—then yes, consciousness change is important.  (I don’t think this is how political change happens, but that’s a topic for another day.)  But I sense a widespread commitment to a type of politics in which consciousness change is the whole story; it’s not an element in a larger process—it is the process.

It could be that the perspective centered on transformation of consciousness is actually driving the spread of counseling-ism, rather than taking hold as a result of it.  I might be confusing cause and effect.  Or maybe it’s just coincidental.  I need help in understanding this.

What I do think I am observing, though, is a systematic shift, especially in large parts of the left, toward a view that social problems and solutions can be understood almost entirely as deficiencies of consciousness (“colonized” by oppressive mindsets) to be overcome by transformations of consciousness that empower the marginalized and dispossessed.

I don’t know what empirical evidence would look like on this topic.  I am proceeding from a small set of case studies, including one I have been living through intimately at my place of work.  At this point, if an explanation seems to work for a particular case, that’s a point in its favor.  Useful responses to this very speculative blog post would take the form of cases that either exhibit or contradict its argument.

Wednesday, June 28, 2017

Comments on Profit and Capital

Yeah, I know, Marx wrote three volumes on this, and in 2014 Piketty published in English a more than 700 page book on it that ended up on the bestseller list, although neither of these resolved the long-running debates about the nature of profit or of capital, which continue to swirl.  We have seen recently someone claiming that distinguishing between retained and distributed earnings is the key to understanding profit, and failing to do so means all of economics as we know it is wrong. But then there have been many other views that this view does not remotely address.  Regarding capital itself, which profit is usually thought of as being one of the sources of income related to, let me quote the following that notes a range of views out there.

"What really is capital and what does it mean for value, growth, and distribution?  Is it a pile of produced means of production?  Is it dated labor?  Is it waiting?  Is it roundaboutness?  Is it an accumulated pile of finance?  Is it a social relation?  Is it an independent source of value?  The answers to these questions are probably matters of belief."

From Catastrophe to Chaos: A General Theory of Economic Discontinuities, Kluwer, 1991, p. 125.

I leave it the imagination (or googling) of the reader as to who the author of that book is, although I note that the quotation appeared in the second edition of the book that came out in 2000.


So there are surface issues regarding the nature of profit and capital, and there are deeper issues.  This quotation lists some of the deeper arguments that have been made by different schools of economics. The "pile of produced means of production" is basically a Principles textbook orthodox position, which rules out financial definitions, with many "people in the street " thinking it is an "accumulated pile of finance," a later answer in the list.  People teaching intro econ courses like to pound on wrongness of this popular view, ultimately falling back on the argument that capital is a "factor of production," which means that whatever it is one must be able to use it in actual production processes." Machinery and buildings and other such "produced means of production" do that, so they count, and the building of them is what "real investment" is, not just somebody using some money to buy some financial assets, which is what the person in the street usually means by "investing my capital."  We spend lots of time disabusing them of their delusions, we who know that "money is an illusion," and that while finance is very important in the functioning of modern economies, piles of money or financial assets do not in and of themselves actually produce something.  Rather they are indicators and means for determining who gets to own those actually productive forms of "real capital," oh to throw out another term.

So some of the later definitions seek to get at the foundations of where this producing of these productive means of production come from, all that "real capital investment."  So, if we are inclined to a Ricardo or Marx labor theory of value view, then all we see about is either produced by current or past labor.  That truck over there was put together by workers with machines in a factory, with those machines made by worker and some other machines, which in turn were made further in the past by yet other workers and other machines, and so on and on until we can reduce all of those produced means of production to being really a bunch of current labor plus a whole string of past labor going way back into the depths of time from many many now-dead workers.

Curiously, although the Austrians abjure the labor theory of value, the theory of "roundaboutness" is theirs, notably Bohm-Bawerk anyway, and he derived it precisely from looking at this sort of Ricardo-Marx argument that I laid out.  So past time gets dragged in, with the longer that stream of past labor goes into the past, well, the more roundaboutness, and this is what he said was capital, and to get at another question raised, how it came to be an "independent source of value," from just current labor time.

But dragging in time gets us to"waiting," which also drags in finance, given that we are talking about saving, which is usually done by piling up financial assets of one sort or another, some of which may pay yet another source of capital income, namely interest.  Proto-neoclassical, Nassau Senior, got on this one, although this is deeply part of the official neoclassical canon, which in the formulation of Irving Fisher had the real rate of interest being that which established the intertemporal equilibrium between the willingness to wait by not consuming today, and effectively the marginal product of infestment, or capital is you prefer, coming from the production side, those produced means of production, with an implicit assumption that what does not get consumed and so saved, ends up being invested to create that "real capital," waiting being crucial to all this.

Of course the "social relation" answer is the deeper Marxist view, the part that distinguishes Marx from Ricardo.

Quite aside from this there is the surface aspect of profit and capital, which turns out to be quite complicated, even the trivial surface matter of accounting to measure it.  I said in an earlier post that it is at one level simple, for a firm at least, profit is revenues minus costs.  But agreeing on the proper accounting measure of that gets messy, even for the simplest of firms.  One has to pick a time unit, although a year is pretty conventional for tax reasons, if nothing else.  But what gets counted as revenues?  Sales?  How about money gained from lawsuits?  How about money from illegal bribes that is unreported?  

But it is on the cost side where things get really hairy, and some of those disputes end up with the schools of economics also.  So, we know that since Marchall standard economists have counted the "opportunity cost of capital" and indeed of other factors in principle, as costs, with accountants most definitely not counting those. Accountants like things to be easily measured and straightforward, whereas deciding what is the "niormal rate of return" throws one into much messier territory without a definite answer.  But even avoiding that sort of thing, there are competing schools of accounting. So does one look af FIFO or LIFO?  In looking at the costs of a machine, is it the original amount paid for it or the cost of replacing it, and so on?  In short, even the surface matters of accounting are a huge mess once one looks beneath the surface at all, 

And none of this, not the deeper issues, nor even the surface accounting issues, are remotely resolved by declaring that one must focus on the division between retained and distributed earnings.  Heck, that does not even fully explain firm investments, as only about half of the funding for investments comes from retained earnings, at least in the US economy.  But, maybe this does not matter if one is trying to build a general theory of all economics on such a shallow and empty accounting identity.

Addendum:  There is far far far more I could talk about here, but let me add just a few remarks on one issue that has had a lot of attention recently, the rising share of capital income at the aggregate level, which,  whle not the whole explanation of it, has correlated with the rising income inequality going on in most nations of the world during the last several decades.  Of course this was the main theme of Piketty's book.  He had the data, but his theoretical  explanations drew lots of criticism, including from me.  He fell back on his r> g argument, which was good for marketing the book, but was easily shown not to do the trick  to explain the rising capital income share even on a garden variety aggregate neoclassical production function analysis.  Of course, Cobb-Douglas such functions are useless in this matter as they generate constant factor shares.  And then there is the whole Cambridge capital theory critique of aggregate capital and aggregate production functions,  ironically a critique at least partly shared by more sophisticated Austrian economists as well.   Many dumped on him for throwing in land with the capital stock and returns to land as capital income, which some have argued carries a lot of the weight on the empirical findings.  In the end when pushed, he has tended to fall back on waving his hands about politics and the collapse of unions and social-political power trends for at least part of his explanation, which looks to me to  be playing a big part of it.  Needless to say, focusing on the division between retained versus distributed profits does not remotely address the question of how much of national income is going to capital forms of income.

Barkley Rosser
  

Seattle Minimum Wage

Words cannot describe the torment experienced by the data before they confessed what the University of Washington team got them to confess. I can only urge readers with an open mind to study Table 3 carefully. The average wage increase, from the second quarter of 2014 to the third quarter of 2016, for all employees of single site establishments was 18 percent. Eighteen percent! That is an annual increase of almost 8 percent. For two and a quarter years in a row. Not bad. And the number of hours worked of ALL employees of single site establishments? Up 18 percent in a little over two years. That too is an increase of almost 8 percent per annum

Now multiply that wage by those hours and the total payroll for all employees rose 39.5 percent over the course of nine quarters. An annual rate of increase of 17.5 percent. These are BIG numbers. They are freaking HUGE numbers. 

It must have taken a team of at least six academics to extract a 9.4 percent decline in hours from the 86,842 workers (out of a total of 336,517) earning under $19 dollars an hour at these single-site establishments. Look at the Table and weep.
Now, as I mentioned in a comment on Peter's post, bracket creep alone could do away with at least 7 percent of the missing hours of workers earning under $19 and hour. That is unless we assume that everyone making between about $18 and $19 got approximately zero wage increases while the rest of the crew were getting 10 percent raises. Look at the God damned table. This isn't rocket science.

Tuesday, June 27, 2017

The Seattle Study: Increasing the Minimum Wage as a Way to Boost High Income Jobs

As labor market mavens all know by now, the University of Washington team chosen by the city of Seattle to evaluate its minimum wage law has issued a new report.  This one is particularly juicy since it covers the increase from $11 to $13 an hour, which moved Seattle into new territory, beyond what has been studied elsewhere.  The report makes much of its use of Washington State data which include not only numbers but also hours worked, allowing (in this respect) a more precise analysis of the effect of changes in the statutory minimum on employment.

The headline result is that the elasticity of hours worked to changes wages actually paid is in the vicinity of -300%.  The key paragraph is this:
Our preferred estimates suggest that the Seattle Minimum Wage Ordinance caused hours worked by low-skilled workers (i.e., those earning under $19 per hour) to fall by 9.4% during the three quarters when the minimum wage was $13 per hour, resulting in a loss of 3.5 million hours worked per calendar quarter. Alternative estimates show the number of low-wage jobs declined by 6.8%, which represents a loss of more than 5,000 jobs. These estimates are robust to cutoffs other than $19.  A 3.1% increase in wages in jobs that paid less than $19 coupled with a 9.4% loss in hours yields a labor demand elasticity of roughly -3.0, and this large elasticity estimate is robust to other cutoffs.
This has got the labor econ blogosphere quite excited: finally, after years of published studies that largely downplayed the labor demand disincentive effects of minimum wage laws, a report has been issued that finds immense negative effects—vastly larger in fact than those that have appeared in the past.

The backdrop to this, of course, is the economic performance of the city of Seattle itself, which has been about as strong as any city in the country.  During the period of the latest minimum wage increase Seattle has experienced essentially full employment, as reflected in an unemployment rate of about 3%.  Thus, any negative impact in one part of the city’s economy had to have been offset by positive impacts elsewhere.

And this in fact is also a finding of the Seattle minimum wage study, although its authors don’t mention it.  They restrict their sample of affected workers to those in the low wage labor market, and they employ a range of cutoffs to see how truncating the sample in different ways affect their results, but their empirical methods intrinsically apply to workers at all wage levels.  This is because their strategy for identifying employment impacts is to use various control groups, actual or synthetic, and compare employment between Seattle and these controls before and after the change in the minimum wage.  The employment impact is whatever comes out of this comparison.

Well, guess what?  The treatment-versus-control methods that generate employment losses in the lower-wage segment of the labor market are nearly exactly offset by employment gains in the higher wage segment.  This stands to reason, because Seattle as a whole is doing great: it hasn’t suffered overall from the rise in minimum wages, so dips in some parts of its economy imply bumps in others.

The calculations that make this explicit are performed by Ben Zipperer and John Schmitt of the Economic Policy Institute.  They do this for the overall city economy and also for the restaurant sector.  With its narrower focus, this second approach is especially informative.  The key paragraph here is:
The spurious results are clear in the case of the restaurant industry, as we illustrate in Figure B, where the authors’ own methodology and estimates imply that the Seattle minimum wage increase caused an incredible 20.1 percent growth in restaurant jobs paying above $19.00 per hour. While this number is not directly reported in their paper, it can be precisely inferred from their other results. To make this inference, we first note that when Jardim et al. focus on the restaurant industry, they estimate that the minimum wage increase to $13.00 caused restaurant jobs paying less than $19.00 hour to fall by an average of 10.7 percent (see their Table 9, averaging the estimates provided for the employment fall in 2016). At the same time, they find that the minimum wage caused essentially zero change in the number of all restaurant jobs, regardless of their wage rate. Because jobs under $19.00 comprised 65.4 percent of the restaurant industry prior to the first minimum wage increase (see Jardim et al.’s Table 3 for the 2014Q2–2015Q1 period), and because these jobs shrank by 10.7 percent while overall employment held steady, it follows that Jardim et al.’s estimates imply that the Seattle minimum wage increased the number of restaurant jobs paying over $19.00 per hour by about 20.1 percent.
Remember that these employment estimates are based on comparisons of Seattle to its constructed controls; measured differences are assumed to be due solely to the minimum wage hike that took place in Seattle but not in the comparitors.

One interpretation is that the Seattle study’s methodology didn’t sufficiently control for factors that have caused upward movements in wages (moving workers out of lower and into higher wage categories) in Seattle compared to other communities.  That’s what the EPI folks think.  I prefer to take the results at face value: by increasing the minimum wage we can, by some currently unknown process, cause a big upward shift in wages, not just around the minimum, but all the way up to the stratospheric reaches of the labor market.  That negative elasticity for the lower-paid is fully offset by a positive elasticity for the middle and upper class.

Magic.

Monday, June 26, 2017

Asking The Man in the Street: Research v. Rhetoric

Richard Layard, How to Beat Unemployment, 1986:
"If you ask the man in the street (not Wall Street) what has caused our unemployment, nine times out of ten he will say that it is machines displacing people. In fact for this reason he is often deeply pessimistic about whether we could ever have full employment again."
Dear Professor Layard,

In your 1986 book, "How to Beat Unemployment," you wrote: "If you ask the man in the street (not Wall Street) what has caused our unemployment, nine times out of ten he will say that it is machines displacing people. In fact for this reason he is often deeply pessimistic about whether we could ever have full employment again."

I am curious. Did you ask "the man in the street"?

Cheers,


The Sandwichman

En Français...

Par Michel Husson 
Les économistes dominants pensent que leur «science» a réalisé des progrès fulgurants depuis sa naissance. L’un deux a ainsi pu affirmer que les connaissances économiques de Marx et Malthus «étaient par rapport à ce que nous savons aujourd’hui ce que l’automobile de Cugnot [1725-1804] était par rapport à nos formules 1» [1]. Et, de manière cohérente, ils cherchent à exclure l’histoire de la pensée économique des programmes universitaires. 
On peut très bien défendre la thèse inverse: la discipline économique est au contraire caractérisée par la récurrence de débats dont les termes ne changent pas vraiment, en dépit des habillages modernes. Ce n’est après tout pas étonnant, dans la mesure où les rapports sociaux capitalistes sont fondamentalement invariants. Le débat sur le partage du travail est une bonne illustration de cette proposition. 
Ce débat a récemment rebondi en France et l’argument classique des détracteurs de la réduction du temps de travail a de nouveau été mobilisé. Il consiste à dénoncer le raisonnement statique et «malthusien» selon lequel il y aurait une quantité prédéterminée de travail à partager. Il faudrait au contraire réfléchir aux politiques habiles qui permettraient, moyennant les réformes structurelles appropriées, de dynamiser l’activité et l’emploi. Dans son dernier livre, le «prix Nobel d’économie» (français) Jean Tirole (2014) est allé encore plus loin avec cet amalgame: «paradoxalement, l’hypothèse sous-jacente à la fixité de l’emploi et donc à la politique de réduction du temps de travail afin de permettre un partage de l’emploi est la même que celle qui sous-tend le discours des partis d’extrême droite quand ils soutiennent que les immigrants “prendraient» le travail des résidents nationaux au motif que cet emploi serait en quantité fixe.» [2]
... 

Sunday, June 25, 2017

Marshall's Magic Confidence-Wand

Remember when Say's Law immediately sank without trace once Keynes debunked it?

Here was Alfred Marshall and Mary Paley Marshall in 1881 explaining why there is no such thing as over-production (if there is any such thing as a magic confidence-wand):
§ 4. After every crisis, in every period of commercial depression, it is said that supply is in excess of demand. Of course there may easily be an excessive supply of some particular commodities; so much cloth and furniture and cutlery may have been made that they cannot be sold at a remunerative price. But something more than this is meant. For after a crisis the warehouses are overstocked with goods in almost every important trade; scarcely any trade can continue undiminished production so as to afford a good rate of profits to capital and a good rate of wages to labour. And it is thought that this state of things is one of general over-production. We shall however find that it really is nothing but a state of commercial disorganization; and that the remedy for it is a revival of confidence. 
To begin with, it is clear that, as Mill says, "What constitutes the means of payment for commodities is simply commodities. Each person's means of paying for the productions of other people consist of those which he himself possesses. All sellers are inevitably, and by the meaning of the word, buyers. Could we suddenly double the productive powers of the country, we should double the supply of commodities in every market; but we should, by the same stroke, double the purchasing power. Everybody would bring a double demand as well as supply; everybody would be able to buy twice as much, because every one would have twice as much to offer in exchange." 
But though men have the power to purchase they may not choose to use it. For when confidence has been shaken by failures, capital cannot be got to start new companies or extend old ones. Projects for new railways meet with no favour, ships lie idle, and there are no orders for new ships. There is scarcely any demand for the work of navvies, and not much for the work of the building and the engine-making trades. In short there is but little occupation in any of the trades which make Fixed capital. Those whose skill and capital is specialised in these trades are earning little, and therefore buying little of the produce of other trades. Other trades, finding a poor market for their goods, produce less; they earn less, and therefore they buy less; the diminution of the demand for their wares makes them demand less of other trades. Thus commercial disorganization spreads, the disorganization of one trade throws others out of gear, and they react on it and increase its disorganization. 
The chief cause of the evil is a want of confidence. The greater part of it could be removed almost in an instant if confidence could return, touch all industries with her magic wand, and make them continue their production and their demand for the wares of others. If all trades which make goods for direct consumption agreed to work on and to buy each other's goods as in ordinary times, they would supply one another with the means of earning a moderate rate of profits and of wages. 

"If There Is Any Such Thing": Why read Hoxie on theory?

Unionists are not theorists; unionism is an eminently practical thing. -- Robert F. Hoxie 
Theory and trade unionism are almost contradictory terms. -- Edward M. Arnos  
In accordance with this theory it is held that there is a certain fixed amount of work to be done... David F. Schloss
Paul Samuelson once wrote that it takes a theory to kill a theory. He didn't say it had to be a better theory. What would it take to kill a theory that never was?

The Sandwichman's summer project has been to consolidate my research and blog posts on the lump of labor from the last ten years into something like -- and yet unlike -- "the archaic stillness of the book." Sometimes, when cross checking old sources, new sources spring up out of the archives and one of the most astonishing was Robert Hoxie's commentary on what he called "fixed group demand theory."

The term appears elsewhere only in a few sources: a dictionary entry on the lump-of-labor theory in What's What in the Labor Movement: A Dictionary of Labor Affairs and Labor Terminology (1921) by Waldo Ralph Browne, in The Settlement of Wage Disputes (1921) by Herbert Feis, whose discussion mainly centered on Hoxie's analysis, and Warren Gartman made a brief, parenthetical reference to the theory in a 1950 report on Longshore Labor Relations on the Pacific Coast, 1934-50. By  far the most substantive treatment of fixed group demand theory was in Edward M. Arnos's 1915 article, "An Interpretation of the Working Rules of the Carpenters' Unions of Chicago." Arnos was a doctoral student at the University of Chicago at the time when Hoxie was conducting his research on organized labor's views on the Taylor method ("scientific management") and Hoxie engaged his students in the research project. Hoxie also wrote on the concept of fixed group demand previously without using the terminology. I reproduce both Arnos's and Hoxie's discussion below.

Hoxie's novel method was to ask people why they did something. Appendix II of his Trade Unionism in the United States contains an 18 page outline and summary of  the "students' report on trade union program." Appendix VIII of Hoxie's Scientific Management and Labor presents over 100 pages of questions used by Hoxie in that study. In the latter study, Hoxie prepared preliminary statements based on extensive reviews of the literature, summarizing the labor claims made by scientific management and the objections to scientific management by unions. He then circulated the summaries to proponents of scientific management and labor leaders, respectively, for their revision and approval. By his own account, Arnos's investigation followed similarly thorough methods.

The point of such rigorous investigation was not to vindicate or invalidate the theories in question but to examine their claims in the light of experience. The outcome was not a triumph for one theory and a defeat for another -- a sorting into economic laws and economic fallacies -- but an assessment of the extent to which each of the competing theories had merit and their respective limitations. Hoxie operated in the spirit of ethical debate as latter proposed by Anatol Rapoport.

There are two aspects of Hoxie's discussion of fixed group demand theory I would like to emphasize. The first is his explanation of unions' restrictive rules as pragmatic, opportunistic measures adopted locally and retained through trial and error rather than in accordance with some overarching "theory" of how the economy works.

The second is a subtle but devastating critique of the pretension of economic theory to apply simultaneously to both the universal long run and to local immediacy. In Trade Unionism in the United States, Hoxie rhetorically affirmed the validity of the classical economic analysis "when applied to society as a whole, if there is any such thing, and in the long run" while objecting that for workers, "there is no society as a whole, and no long run, but immediate need and rival social groups." A few years later, Maynard Keynes echoed the assessment that "this long run is a misleading guide to current affairs."

In a brief essay on "The Theory of Unionism: Principles of Uniformity," Hoxie thinly muzzled a searing critique of economic orthodoxy by presenting it as the employer's naïve conclusion: 
Apparently it rarely occurs to the employer that this analysis is not complete. Having assumed that definite laws determine the manner in which income is shared among the productive factors, he apparently concludes, somewhat naively, that just as the laborers in society will in the aggregate profit by increase in the social income, so also will the laborers in any individual establishment profit by increase in its income.
Hoxie's "employer" is simply parroting the old "Say's Law" truism that, as Alfred Marshall put it, "the demand for work comes from the National Dividend; that is, it comes from work: the less work there is of one kind, the less demand there is for work of other kinds; and if labour were scarce, fewer enterprises would be undertaken." Marshall's "national dividend" was an updated and sanitized label for what a decade earlier in The Economics of Industry, he still referred to as the "wages-and-profits fund," which was too close to the discredited wages-fund to escape scrutiny. The bottom line, though, remained that "there is no such thing as general overproduction." There is only ever "commercial disorganization; and that the remedy for it is a revival of confidence."
The chief cause of the evil is a want of confidence. The greater part of it could be removed almost in an instant if confidence could return, touch all industries with her magic wand, and make them continue their production and their demand for the wares of others. If all trades which make goods for direct consumption agreed to work on and to buy each other's goods as in ordinary times, they would supply one another with the means of earning a moderate rate of profits and of wages. 
Although Marshall didn't mention this, it follows from his analysis of the impossibility of overproduction that in a crisis entrepreneurs commit the lump of confidence fallacy (or the fallacy of the fixed Confidence-fund). If only they understood how the "magic wand" of confidence works. Nor did Marshall happen to mention that the employers' stock remedies for hard times of cutting wages and/or laying off workers simply reflects their obliviousness to the fact that "there is no such thing as general overproduction."

Why worry about what Alfred Marshall wrote or didn't write 136 years ago? Because it is the dogma echoed down through the ages, such as in this 1986 gem by Richard Layard, How to Beat Unemployment:
The one fatal heresy in economic analysis is to take output as given. That is the 'lump of output' fallacy. You must always have a theory of how output is determined and you must never say, 'Higher output per worker reduces employment, because it reduces the employment needed to produce a given output'. Likewise you must never say 'More people cause unemployment', unless you can explain why output will not grow.
Along with Richard Jackman, Layard recycled the archaic and bogus analysis the next year in a pamphlet, "Innovative Supply-Side Policies to Reduce Unemployment" and yet again in 1991, adding Stephen Nickell to the team in Unemployment: Macroeconomic Performance and the Labour Market. This "analysis" became the basis of Tony Blair's and Gerhard Schroeder's miserable "New Supply-Side Agenda for the Left." Jonathan Portes's proudest accomplishment was explaining the lump-of-labour fallacy to successive cabinet ministers. And so the magic wand of confidence waves on...

But enough about the magic confidence wand (if there is any such thing). Below is some true grit from Hoxie and Arnos.

Robert F. Hoxie "The Theory of Unionism: Principles of Uniformity," in Readings in Current Economic Problems, 1915
The third charge against the unionist which we have undertaken to examine states that while he is struggling for increase of wages he is at the same time attempting to reduce the efficiency of labor and the amount of the output. In other words, while he is calling upon the employer for more of the means of life he is doing much to block the efforts of the employer to increase those means. 
There is no doubt that this charge is to a great extent true. In reasoning upon this matter the employer, viewing competitive society as a whole, assumes that actual or prospective increase in the goods' output means the bidding-up of wages by employers anxious to invest profitably increasing social income. It follows that in competitive society laborers as a whole stand to gain with improvements in industrial effort and process. In the case of the individual competitive establishment it is clear that the maximum income is ordinarily to be sought in the highest possible efficiency, resulting in increased industrial output. At least this is true where there are numerous establishments of fairly equal capacity producing competitively from the same market. Under such circumstances the increased output of any one establishment due to "speeding up" will ordinarily have but a slight, if any, appreciable effect on price. Each individual entrepreneur, therefore, is justified in assuming a fixed price for his product and in reckoning on increase of income from increase of efficiency and industrial product. Apparently it rarely occurs to the employer that this analysis is not complete. Having assumed that definite laws determine the manner in which income is shared among the productive factors, he apparently concludes, somewhat naively, that just as the laborers in society will in the aggregate profit by increase in the social income, so also will the laborers in any individual establishment profit by increase in its income.  
To this mode of reasoning, and to the conclusions reached through it, the unionist takes very decided exceptions. To the statement that labor as a whole stands to gain through any increase in the social dividend he returns the obvious answer that   labor as a whole is a mere academic conception; that labor as a whole may gain while the individual laborer starves. His concern is with his own wage-rate and that of his immediate fellow-workers. He has learned the lesson of co-operation within his trade, but he is not yet class-conscious. In answer to the argument based on the individual competitive establishment he asserts that the conditions which determine the income of the establishment are not the same as those which govern the wage-rate. Consequently, increase in the income of the establishment is no guarantee of increase of the wage-rate of the worker in it. Conversely, increase in the wage rate may occur without increase in the income of the establishment. Indeed, in consequence of this non-identity of the conditions governing establishment income and wage-rate, increase in the gross income of the establishment is often accompanied by decrease in the wage-rate, and the wage-rate is often increased by means which positively decrease the gross income of the establishment.  
The laborer's statements in this instance are without doubt well founded. The clue to the whole situation is, of course, found in the fact that the wage-rate of any class of laborers is not determined by the conditions which exist in the particular establishment in which they work, but by the conditions which prevail in their trade or "non-competing group." With this commonplace economic argument in mind, the reasonableness of the unionist's opposition to speeding up, and of his persistent efforts to hamper production, at once appears.
"An Interpretation of the Working Rules of the Carpenters' Unions of Chicago," Edward M. Arnos, 17th Report of the Michigan Academy of Science, 1916
Theory and trade unionism are almost contradictory terms. The trial and error method of testing rules, the ever changing conditions of the trade, the large number of men concerned in the agreement, the different nationalities represented in the union personnel, and the triennial agreements have left the carpenters' rules marked as if they are in a process. The constant changes in the agreements evince the carpenters' struggle to get control of the trade, first by one method or rule and then by another. This trial and error method has removed at least the trace of theory as a controlling force in the construction of the joint agreement. Journeymen are seldom conscious of any underlying theory of the rules in explaining their demands, methods, policies, and aims. Although the development of the rules has been free from the control of theorists, development has been in harmony with certain theories of business and human relationship. The theory of standardization, the theory of undercutting, the fixed group demand or lump labor theory, and the standard of living theory, are vital to the carpenters' rules. Journeymen may not realize the presence of any theories, nevertheless the officers interpret the rules in the light of these theories. To illustrate, one business agent said the rule prohibiting journeymen from taking their tools on the job before they were employed was to prevent men from gathering around the places of employment prepared to work, because the employers used their presence to intimidate the journeymen on the job; i. e., according to his theory of life, men who were out of employment would place themselves where they could underbid their fellows who were employed. To illustrate the underlying force of their fixed group demand theory, one of the officials said that they were in favor of a raise of wages to 70 cents per hour because there was a certain amount of work to be done and the carpenters could get 70 cents per hour as well as 65 cents. Thus consciously or unconsciously, the carpenters supported all of their rules by some of their theories of life. Let us consider these theories and their significance after careful analysis. 
… 
The presence of an unemployed group and their theory of undercutting necessitates standards and uniform units of measurement. Thus the first of the hypothetical theories is accounted for. This assumption of the constant over-supply of labor also presupposes that there is a fixed group demand for labor, thus their theory of a fixed group demand or "lump of labor" theory. The third theory to be considered is that of the fixed group demand. This fixed group demand is usually approached through the desire to share work among their members, which they accomplish by limiting the supply of labor. Their rules on apprenticeship so limit the number of apprentices that it is said that only the sons of the most prominent journeymen are indentured. The number of apprentices range from one to two per cent of the number of journeymen. Rushing and excessive work have the same effect upon the supply of labor, through the limitation of the amount of work to be done in a certain time. The eight hour day and holidays limit the number of working hours and thus limit the labor supply. The fixed group demand theory is supported by their experience of unemployment. The leaders contend that the unemployed are as numerous under low wages as they are under high wages. The hypothesis is that there is a certain amount of carpentering to be done in Chicago. This is fixed by the number of persons who live there. To quote an official, "a man wouldn't live in a tent if wages were high nor in two houses if they were low." Of course this opinion would not bear strict interpretation nor do they claim that for it. The constant increase in the scale of wages and the accompanying decrease in unemployment in the trade are often cited as proof of their hypothesis. Their wage slogans, "high wages breed high wages," "no wage reductions," "cheap wages make cheap men," and "get more now," have their origin in this group of facts. 
Their fixed group demand theory explains the union's defense for limiting the output. The public press has frequently denounced trade unions for limiting the output. Employers have made most bitter attacks upon the union for those rules and practices which result in limiting the output. The opponents of trade unions on this point usually argue that prices to the consumer are thus raised, and charge the union with a breach of good faith with society. The business man, the entrepreneur, and the classical economist would usually undertake to solve the problem of unemployment by reducing wages with the hope that the demand for labor would be increased by reason of the decrease in wages. Not so with the trade unionist. He has a different theory of business. The former groups think that prices and demand vary inversely, the latter group thinks that "there is a certain amount of work to be done and a certain number of men to do it. Each should be given a chance to do some of it." In a few words, their theory is that there is a fixed demand for commodities regardless of price, within a reasonable limit. According to this latter theory, a man does not buy a straw hat because it is cheap, but because it is the custom of certain classes to wear a certain kind of hat on certain occasions. The increase in wages for the makers of high hats would probably not decrease the demand for that particular kind of hat. On the other hand the author of the foregoing reasoning admitted that he would buy an automobile if the price dropped to one hundred dollars and unwillingly admitted that his demand in the automobile market would increase the demand for mechanics. Neither of the above theories are valid if applied to the extreme, and are contradictory when so applied. The carpenters observe from experience that a change in wages is not followed by a corresponding change in demand for labor. They try to take advantage of this slowness of "demanders" to adjust themselves to a changed condition of supply. The union theory operates in these cases where the demand for an article does not fall when the price is raised, or in technical language, Where the demand is inelastic, and the opponents' theory operates in those cases Where the demand for an article falls off rapidly as the price is increased, or in technical language, where the demand is elastic. The demand for salt and carpenter work is almost fixed or "inelastic," and the demand for automobiles is quite elastic. Therefore the carpenters' and the employers' theories are both valid as you limit their applications and neither theory has universal applications.