F Financial Sector Induced Systemic Instability of Economy

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Financial Sector Induced Systemic Instability of Economy

While I believe in usefulness of capital markets, it is clear that they are double edge sword and that banks "in a long run" tend to behave like sociopathic individuals. Mr. Capone may have something to say about danger of banks :-).That means that  growth of financial sector represents a direct threat to the stability of the society. Positive feedback loops creates one financial crisis after another with the increasing magnitude leading up to a collapse of financial system like happened in 1927 and 2008.

News Casino Capitalism Recommended Links  Stability is destabilizing: The idea of Minsky moment Corruption of Regulators Quiet coup
Neoliberalism as a New Form of Corporatism Principal-agent problem Numbers racket Criminal negligence in financial regulation Corruption of FED Invisible Hand Hypothesis
The “Too Big To Fail” Problem In Goldman Sachs we trust Citi - The bank that couldn’t shoot straight JPMorgan AIG collapse Lehman
Free Markets Newspeak as Opium for regulators Derivatives Lobby Corrupts Congress Lobbying and the Financial Crisis Control Fraud
(crisis of corporate governance)
Stock Market with buybacks as a Ponzi scheme Derivatives
Small government smoke screen Financial Bonuses as Money Laundering Corporatist Corruption: Systemic Fraud under Clinton-Bush-Obama Regime Corporatism   Financial obesity
Webliography of heterodox economists HFT Aleynikov vs. Goldman Sachs Casino Capitalism Dictionary Financial Humor Etc
  "Minsky's financial instability hypothesis depends critically on what amounts to a sociological insight. People change their minds about taking risks. They don't make a one-time rational judgment about debt use and stock market exposure and stick to it. Instead, they change their minds over time. And history is quite clear about how they change their minds. The longer the good times endure, the more people begin to see wisdom in risky strategies."

The Cost of Capitalism: Understanding Market Mayhem and Stabilizing our Economic Future, by Robert Barbera

The flaw with Capitalism is that it creates its own positive feedback loop, snowballing to the point where the accumulation of wealth and power hurts people — eventually even those at the top of the food chain. ”

Uncle Billy Cunctator
In comment to Economic Donkeys

 
  Banks are a clear case of market failure and their employees at the senior level have basically become the biggest bank robbers of all time. As for basing pay on current revenues and not profits over extended periods of time, then that is a clear case of market failure !  
  The banksters have been able to sell the “talent” myth to justify their outsized pay because they are the only ones able to deliver the type of GDP growth the U.S. economy needs in the short term, even if that kills the U.S. economy in the long term. You’ll be gone, I’ll be gone.  
  Unfortunately, many countries go broke pursuing war, if not financially, then morally (are the two different? – this post suggests otherwise).

I occurs to me that the U.S. is also in that flock; interventions justified by grand cause built on fallacy, the alpha and omega of failure. Is the financial apparatchik (or Nomenklatura, a term I like which, as many from the Soviet era, succinctly describes aspects of our situation today) fated also to the trash heap, despite the best efforts of the Man of the hour, Ben Bernanke?

 

Introduction

While I believe in usefulness of capital markets, it is clear that they are double edge sword and that banks "in a long run" tend to behave like sociopathic individuals. Mr. Capone may have something to say about danger of banks :-).That means that growth of financial sector represents a direct threat to the stability of the society (Keynesianism and the Great Recession )

Without adult supervision, as it were, a financial sector that was already inherently unstable went wild. When the subprime assets were found to be toxic since they were based on mortgages on which borrowers had defaulted, highly indebted or leveraged banks that had bought these now valueless securities had little equity to repay their creditors or depositors who now came after them. This quickly led to their bankruptcy, as in the case of Lehman Brothers, or to their being bailed out by government, as was the case with most of the biggest banks. The finance sector froze up, resulting in a recession—a big one—in the real economy.

Neoliberal revolution, or, as Simon Johnson called it after "quite coup" (Atlantic), brought political power to the financial oligarchy deposed after the New Deal. Deregulation naturally followed, with especially big role played by corrupt Clinton administration.  Positive feedback loops creates one financial crisis after another with the increasing magnitude. "Saving and loans" crisis followed by dot-com crisis of  2000, which in turn followed by the collapse of financial system in 2008, which looks somewhat similar to what happened in 1927.  No prominent financial honcho, who was instrumental in creating "subprime crisis" was jailed.  Most remained filthy rich.

Unless the society puts severe limits on their actions like was done during New Deal,  financial firms successfully subvert the regulation mechanisms and take the society hostage.  But periodic purges with relocation of the most active promoters of "freedom for banks" (aka free market fundamentalism) under the smoke screen of "free market" promotion does not solve the problem of positive feedback loops that banks create by mere existence. That's difficult to do while neoliberal ideology and related neoclassical economy dominates the society thinking (via brainwashing), with universities playing especially negative role -- most of economics departments are captured by neoliberals who censor any heretics. So year after year brainwashing students enter the society without understanding real dangers that neoliberalism brought for them.  Including lack of meaningful employment opportunities.

Of course, most of high level officers of leading finance institutions which caused the crisis of 2008-2009 as a psychological type are as close to  gangsters as one can get. But there is something in their actions that does not depend on individual traits (although many of them definitely can be classified as psychopaths), and is more related to their social position.  This situation is somewhat similar to Bolsheviks coup d'état of 1917 which resulted in capturing Russia by this ideological sect.  And in this sense quite coupe of 1980 is also irreversible in the same sense as Bolsheviks revolution was irreversible:  the "occupation" of the country by a fanatical sect lasts until the population rejects the ideology with its (now apparent) utopian claims.

Bolshevism which lasted 75 years, spend in such zombie state the last two decades (if we assume 1991 as the year of death of Bolshevism, its ideology was dead much earlier -- the grave flaws in it were visible from late 60th, if not after the WWII).  But only  when their ideology was destroyed both by inability to raise the standard of living of the population and by the growing neoliberal ideology as an alternative (and a new, more powerful then Marxism high-demand cult) Bolsheviks started to lose the grip on their power in the country. As a result Bolsheviks lost the power only in 1991, or more correctly switched camps and privatized the country. If not inaptness of their last General Secretary, they probably could last more. In any case after the ideology collapsed, the USSR disintegrated (or more correctly turn by national elites, each of which wanted their peace of the pie).

The sad truth is that the mere growth of financial sector creates additional positive feedback loops and increases structural instability within both the financial sector itself and the society at large. Dynamic systems with strong positive feedback loops not compensated by negative feedback loops are unstable. As a result banks and other financial institution periodically generate a deep, devastating crisis. This is the meaning of famous Hyman Minsky phrase "stability is destabilizing".

In other words, financial apparatchiks (or Financial Nomenklatura, a term from the Soviet era, which succinctly describes aspects of our situation today) drive the country off the cliff because they do not have any countervailing forces, by the strength of their political influence and unsaturable greed. Although the following analogy in weaker then analogy with dynamic systems with positive feedback loops, outsized financial sector can be viewed in  biological terms as cancer.

Cancer, known medically as a malignant neoplasm, is a broad group of diseases involving unregulated cell growth. In cancer, cells divide and grow uncontrollably, forming malignant tumors, and invading nearby parts of the body. The cancer may also spread to more distant parts of the body through the lymphatic system or bloodstream. Not all tumors are cancerous; benign tumors do not invade neighboring tissues and do not spread throughout the body. There are over 200 different known cancers that affect humans.[1]

Like certain types of cancer they depend of weakening "tumor suppressor genes"  (via "Quiet coup" mechanism of acquiring dominant political power) which allow then to engage in uncontrolled growth, destroying healthy cells (and first of all local manufacturing).   

The other suspicion is the unchecked financialization always goes too far and the last N percent of financial activity absorbs much more resources (especially intellectual resources) and creates more potential instability than its additional efficiency-benefits (often zero or negative) can justify. It is hard to imagine that a Hedge Fund Operator of the Year does anything that is even remotely socially useful to justify his enormous (and lightly taxed) compensation. It is pure wealth redistribution up based on political domination of financial oligarchy.  Significant vulnerabilities  within the shadow banking system and derivatives are plain vanilla socially destructive. Yet they persist due to inevitable political power grab by financial oligarchy  (Quiet coup).

Again, I would like to stress that this problem of the oversized financial sector which produces one devastating crisis after another   is closely related to the problem of a positive feedback loops. And the society in which banks are given free hand inevitably degrades into "socialism for banks"  or "casino capitalism" -- a type of neoliberalism with huge inequality and huge criminality of top banking officers.  

Whether we can do without private banks is unclear, but there is sound evidence that unlike growth of manufacturing, private financial sector growth is dangerous for the society health and perverts society goals.  Like cult groups the financial world does a terrific job of "shunning" the principled individuals and suppressing dissent (by capturing and cultivating neoliberal stooges in all major university departments and press),  so self-destructing tendencies after they arise can't be stopped within the framework of neoliberalism. In a way financial firm is like sociopath inevitable produces its  trail of victims (and sociopaths might be useful in battles exactly due to the qualities such as ability to remain cool in dangerous situation, that make them dangerous in the normal course of events).

This tendency of society with unregulated or lightly regulated financial sector toward self-destruction was first formulated as "Minsky instability hypothesis" -- and outstanding intellectual achievement of American economic Hyman Minsky (September 23, 1919 – October 24, 1996). Who BTW was pretty much underappreciated (if not suppressed) during his lifetime because his views were different from  orthodox (and false) neoclassic economic theory which dominates US universities, Like flat Earth theory was enforce by Catholic church before, it is fiercely enforced by an army of well paid neoliberal economics, those Jesuits of modern era. Who prosecute heretics who question flat Earth theory even more efficiently then their medieval counterparts; the only difference is that they do not burn the literally, only figuratively ;-)

Minsky financial instability hypothesis

Former Washington University in St. Louis economics professor Hyman P. Minsky had predicted the Great Recession decades before it happened.  Hyman Minsky was a real student of the Great Depression, while Bernanke who widely is viewed as a scholar who studied the Great Depression, in reality was a charlatan, who just tried to explain the Great Depression from the positions of neo-classical economy. That's a big difference.

Minsky instability hypothesis ("stability is destabilizing" under capitalism) that emerged from his analysis of the Great Depression was based on intellectual heritage of three great thinkers in economics (my presentation is partially based on an outstanding lecture by Steve Keen Lecture 6 on Minsky, Financial Instability, the Great Depression & the Global Financial Crisis). We can talk about three source of influence, there authors writing of which touched the same subject from similar positions and were the base of Hyman Minsky great advance in understanding of mechanics of development of financial crisis under capitalism and the critical role of financial system in it (neoclassical economics ignores the existence of financial system in its analysis): 

  1. Karl Marx influence
  2. Irving Fisher influence
  3. Joseph Schumpeter influence

Karl Marx influence

Minsky didn't follow the conventional version of Marxism  . And it was dangerous for him to do so due to McCarthysm. Even mentioning of Marx might lead to strakism fromthe academy those years.  McCarthy and his followers in academy did not understand the difference between Marx great analysis of capitalism and his utopian vision of the future. Impliedly this witch hunt helped to establish hegemony of neoclassical economy in economic departments in the USA.

While Minsky did not cited Marx in his writings and did use Marx's Labor Theory of Value his thinking was definitely influenced by Marx’s critique of  finance. We now know that he read and admired the Capital. And that not accidental due to the fact that his parents were Mensheviks -- a suppressed after Bolshevik revolution more moderate wing of Russian Social Democratic Party that rejected the idea of launching the socialist revolution in Russia --  in their opinion Russia needed first to became a capitalist country and get rid of remnants of feudalism. They escaped from Soviet Russia when Mensheviks started to be prosecuted by Bolsheviks.

And probably the main influence on Minsky was not Marx's discussion  of finance in Volume I of Capital with a "commodity" model of money, but critical remarks scattered in   Volumes II & III (which were not edited by Marx by compiled posthumously by Engels), where he was really critical of big banks as well as Marx's earlier works (Grundrisse, Theories of Surplus Value) where Marx was scathing about finance:

"A high rate of interest can also indicate, as it did in 1857, that the country is undermined by the roving cavaliers of credit who can afford to pay a high interest because they pay it out of other people's pocket* (whereby, however, they help to determine the rate of interest  for all) and meanwhile they live in grand style on anticipated profits. 

Irving Fisher influence

The second source on which Minsky based his insights was Irving Fisher. Irving Fisher’s reputation destroyed by wrong predictions on stock market prices. In aftermath, developed theory to explain the crash and published it in his book  "The Debt Deflation Theory of Great Depressions". His main points are:

According to Fisher two key disequilibrium forces that push economic into the next economic crisis are debt and subsequent deflation

Joseph Schumpeter influence

Joseph Schumpeter was Joseph Schumpeter has more positive view of capitalism than the other two. He authored the theory of creative destruction as a path by which capitalism achieves higher and higher productivity. He capitalism as necessarily unstable, but for him this was a positive feature -- instability of capitalism the source of its creativity. His view of capitalism was highly dynamic and somewhat resembles the view of Marx (who also thought that capitalism destroys all previous order and create a new one):

Unlike Marx, who thought that the periodic crisis of overproduction  is the source of instability (as well as  gradual absolute impoverishment of workers), Minsky assumed that the key source of that instability of capitalist system is connected with the cycles of business borrowing and fractional bank lending, when "good times" lead to excessive borrowing leading to high leverage and overproduction and thus to eventual debt crisis (The Alternative To Neoliberalism ):

Minsky on capitalism:

The idea of Minsky moment is related to the fact that the fractional reserve banking periodically causes credit collapse when the leveraged credit expansion goes into reverse. And mainstream economists do not want to talk about the fact that increasing confidence breeds increased leverage. So financial stability breeds instability and subsequent financial crisis. All actions to guarantee a market rise, ultimately guarantee it's destruction because greed will always take advantage of a "sure thing" and push it beyond reasonable boundaries.  In other words, marker players are no rational and assume that it would be foolish not to maximize leverage in a market which is going up. So the fractional reserve banking mechanisms ultimately and ironically lead to over lending and guarantee the subsequent crisis and the market's destruction. Stability breed instability.

That means that fractional reserve banking based economic system with private players (aka capitalism) is inherently unstable. And first of all because  fractional reserve banking is debt based. In order to have growth it must create debt. Eventually the pyramid of debt crushes and crisis hit. When the credit expansion fuels asset price bubbles, the dangers for the financial sector and the real economy are substantial because this way the credit boom bubble is inflated which eventually burst. The damage done to the economy by the bursting of credit boom bubbles is significant and long lasting.

Blissex said...

«When credit growth fuels asset price bubbles, the dangers for the financial sector and the real economy are much more substantial.»

So M Minsky 50 years ago and M Pettis 15 years ago (in his "The volatility machine") had it right? Who could have imagined! :-)

«In the past decades, central banks typically have taken a hands-off approach to asset price bubbles and credit booms.»

If only! They have been feeding credit-based asset price bubbles by at the same time weakening regulations to push up allowed capital-leverage ratios, and boosting the quantity of credit as high as possible, but specifically most for leveraged speculation on assets, by allowing vast-overvaluations on those assets.

Central banks have worked hard in most Anglo-American countries to redistribute income and wealth from "inflationary" worker incomes to "non-inflationary" rentier incomes via hyper-subsidizing with endless cheap credit the excesses of financial speculation in driving up asset prices.

Not very hands-off at all.

Steve Keen is probably the most well know researcher who tried to creates model of capitalist economy based on Minsky work (  http://www.debtdeflation.com/blogs/manifesto/ )

John Kay in his January 5 2010 FT column very aptly explained the systemic instability of financial sector hypothesis: 

The credit crunch of 2007-08 was the third phase of a larger and longer financial crisis. The first phase was the emerging market defaults of the 1990s. The second was the new economy boom and bust at the turn of the century. The third was the collapse of markets for structured debt products, which had grown so rapidly in the five years up to 2007.

The manifestation of the problem in each phase was different – first emerging markets, then stock markets, then debt. But the mechanics were essentially the same. Financial institutions identified a genuine economic change – the assimilation of some poor countries into the global economy, the opportunities offered to business by new information technology, and the development of opportunities to manage risk and maturity mismatch more effectively through markets. Competition to sell products led to wild exaggeration of the pace and scope of these trends. The resulting herd enthusiasm led to mispricing – particularly in asset markets, which yielded large, and largely illusory, profits, of which a substantial fraction was paid to employees.

Eventually, at the end of each phase, reality impinged. The activities that once seemed so profitable – funding the financial systems of emerging economies, promoting start-up internet businesses, trading in structured debt products – turned out, in fact, to have been a source of losses. Lenders had to make write-offs, most of the new economy stocks proved valueless and many structured products became unmarketable. Governments, and particularly the US government, reacted on each occasion by pumping money into the financial system in the hope of staving off wider collapse, with some degree of success. At the end of each phase, regulators and financial institutions declared that lessons had been learnt. While measures were implemented which, if they had been introduced five years earlier, might have prevented the most recent crisis from taking the particular form it did, these responses addressed the particular problem that had just occurred, rather than the underlying generic problems of skewed incentives and dysfunctional institutional structures.

The public support of markets provided on each occasion the fuel needed to stoke the next crisis. Each boom and bust is larger than the last. Since the alleviating action is also larger, the pattern is one of cycles of increasing amplitude.

I do not know what the epicenter of the next crisis will be, except that it is unlikely to involve structured debt products. I do know that unless human nature changes or there is fundamental change in the structure of the financial services industry – equally improbable – there will be another manifestation once again based on naive extrapolation and collective magical thinking. The recent crisis taxed to the full – the word tax is used deliberately – the resources of world governments and their citizens. Even if there is will to respond to the next crisis, the capacity to do so may not be there.

The citizens of that most placid of countries, Iceland, now backed by their president, have found a characteristically polite and restrained way of disputing an obligation to stump up large sums of cash to pay for the arrogance and greed of other people. They are right. We should listen to them before the same message is conveyed in much more violent form, in another place and at another time. But it seems unlikely that we will.

We made a mistake in the closing decades of the 20th century. We removed restrictions that had imposed functional separation on financial institutions. This led to businesses riddled with conflicts of interest and culture, controlled by warring groups of their own senior employees. The scale of resources such businesses commanded enabled them to wield influence to create a – for them – virtuous circle of growing economic and political power. That mistake will not be easily remedied, and that is why I view the new decade with great apprehension. In the name of free markets, we created a monster that threatens to destroy the very free markets we extol.

While Hyman Minsky was the first clearly formulate the financial instability hypothesis, Keynes also understood this dynamic pretty well. He postulated that a world with a large financial sector and an excessive emphasis on the production of investment products creates instability both in terms of output and prices. In other words it automatically tends to generate credit and asset bubbles.  The key driver is the fact that financial professionals generally risk other people’s money and due to this fact have asymmetrical incentives:

This asymmetry is not a new observation of this systemic problem. Andrew Jackson noted it in much more polemic way long ago:

“Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I intend to rout you out, and by the grace of the Eternal God, will rout you out.”

This asymmetrical incentives ensure that the financial system is structurally biased toward taking on more risk than what should be taken. In other words it naturally tend to slide to the casino model, the with omnipresent reckless gambling as the primary and the most profitable mode of operation while an opportunities last.  The only way to counter this is to throw sand into the wheels of financial mechanism:  enforce strict regulations, limit money supplies and periodically jail too enthusiastic bankers. The latter is as important or even more important as the other two because bankers tend to abuse "limited liability" status like no other sector.

Asset inflation over the past 10 years and the subsequent catastrophe incurred is a way classic behavior of dynamic system with strong positive feedback loop.  Such behavior does not depends of personalities of bankers or policymakers, but is an immanent property of this class of dynamic systems. And the main driving force here was deregulation. So its important that new regulation has safety feature which make removal of it more complicated and requiring bigger majority like is the case with constitutional issues.

Another fact was the fact that due to perverted incentives, accounting in the banks was fraudulent from the very beginning and it was fraudulent on purpose.  Essentially accounting in banks automatically become as bad as law enforcement permits. This is a classic case of control fraud and from prevention standpoint is make sense to establish huge penalties for auditors, which might hurt healthy institutions but help to ensure that the most fraudulent institution lose these bank charter before affecting the whole system.  With the anti-regulatory zeal of Bush II administration the level of auditing became too superficial, almost non-existent. I remember perverted dances with Sarbanes–Oxley when it was clear from the very beginning that the real goal is not to strengthen accounting but to earn fees and to create as much profitable red tape as possible, in perfect Soviet bureaucracy style.

Deregulation also increases systemic risk by influencing the real goals of financial organizations. At some point of deregulation process the goal of higher remuneration for the top brass becomes self-sustainable trend  and replaces all other goals of the financial organization. This is the essence of  Martin Taylor’s, the former chief executive of Barclays,  article FT.com - Innumerate bankers were ripe for a reckoning in the Financial Times (Dec 15, 2009), which is worth reading in its entirety:

City people have always been paid well relative to others, but megabonuses are quite new. From my own experience, in the mid-1990s no more than four or five employees of Barclays’ then investment bank were paid more than £1m, and no one got near £2m. Around the turn of the millennium across the market things began to take off, and accelerated rapidly – after a pause in 2001-03 – so that exceptionally high remuneration, not just individually, but in total, was paid out between 2004 and 2007.

Observers of financial services saw unbelievable prosperity and apparently immense value added. Yet two years later the whole industry was bankrupt. A simple reason underlies this: any industry that pays out in cash colossal accounting profits that are largely imaginary will go bust quickly. Not only has the industry – and by extension societies that depend on it – been spending money that is no longer there, it has been giving away money that it only imagined it had in the first place. Worse, it seems to want to do it all again.

What were the sources of this imaginary wealth?

In the last two of these the bank was not receiving any income, merely “booking revenues”. How could they pay this non-existent wealth out in cash to their employees? Because they had no measure of cash flow to tell them they were idiots, and because everyone else was doing it. Paying out 50 per cent of revenues to staff had become the rule, even when the “revenues” did not actually consist of money.

In the next phase instability is amplified by the way governments and central banks respond to crises caused by credit bubble: the state has powerful means to end a recession, but the policies it uses give rise to the next phase of instability, the next bubble…. When money is virtually free – or, at least, at 0.5 per cent – traders feel stupid if they don’t leverage up to the hilt. Thus previous bubble and crash become a dress rehearsal for the next.

Resulting self-sustaining "boom-bust" cycle is very close how electronic systems with positive feedback loop behave and   cannot be explained by neo-classical macroeconomic models. Like with electronic devices the financial institution in this mode are unable to provide the services that are needed.

As Minsky noted long ago (sited from Stephen Mihm  Why capitalism fails Boston Globe):

Modern finance, he argued, was far from the stabilizing force that mainstream economics portrayed: rather, it was a system that created the illusion of stability while simultaneously creating the conditions for an inevitable and dramatic collapse.

...our whole financial system contains the seeds of its own destruction. “Instability,” he wrote, “is an inherent and inescapable flaw of capitalism.”

Minsky’s vision might have been dark, but he was not a fatalist; he believed it was possible to craft policies that could blunt the collateral damage caused by financial crises. But with a growing number of economists eager to declare the recession over, and the crisis itself apparently behind us, these policies may prove as discomforting as the theories that prompted them in the first place. Indeed, as economists re-embrace Minsky’s prophetic insights, it is far from clear that they’re ready to reckon with the full implications of what he saw.

And he understood the roots of the current credit bubble much better that neoclassical economists like Bernanke: 
As people forget that failure is a possibility, a “euphoric economy” eventually develops, fueled by the rise of far riskier borrowers - what [Minsky] called speculative borrowers, those whose income would cover interest payments but not the principal; and those he called “Ponzi borrowers,” those whose income could cover neither, and could only pay their bills by borrowing still further.

As these latter categories grew, the overall economy would shift from a conservative but profitable environment to a much more freewheeling system dominated by players whose survival depended not on sound business plans, but on borrowed money and freely available credit.

Minsky’s financial instability hypothesis suggests that when optimism is high and ample funds are available for investment, investors tend to migrate from the safe hedge end of the Minsky spectrum to the risky speculative and Ponzi end. Indeed, in the current crisis, investors tried to raise returns by increasing leverage and switching to financing via short-term—sometimes overnight— borrowing (Too late to learn?):

In the church of Friedman, inflation was the ol' devil tempting the good folk; the 1980s seemed to prove that, let loose, it would cause untold havoc on the populace. But, as Barbera notes:

The last five major global cyclical events were the early 1990s recession - largely occasioned by the US Savings & Loan crisis, the collapse of Japan Inc after the stock market crash of 1990, the Asian crisis of the mid-1990s, the fabulous technology boom/bust cycle at the turn of the millennium, and the unprecedented rise and then collapse for US residential real estate in 2007-2008. All five episodes delivered recessions, either global or regional. In no case was there a significant prior acceleration of wages and general prices. In each case, an investment boom and an associated asset market ran to improbable heights and then collapsed. From 1945 to 1985, there was no recession caused by the instability of investment prompted by financial speculation - and since 1985 there has been no recession that has not been caused by these factors.
Thus, meet the devil in Minsky's paradise - "an investment boom and an associated asset market [that] ran to improbable heights and then collapsed".

According the Barbera, "Minsky's financial instability hypothesis depends critically on what amounts to a sociological insight. People change their minds about taking risks. They don't make a one-time rational judgment about debt use and stock market exposure and stick to it. Instead, they change their minds over time. And history is quite clear about how they change their minds. The longer the good times endure, the more people begin to see wisdom in risky strategies."

Current economy state can be called following Paul McCulley a "stable disequilibrium" very similar to a state  a sand pile.  All this pile of  stocks, debt instruments, derivatives, credit default swaps and God know corresponds to a  pile of sand that is on the verse of losing stability. Each financial player works hard to maximize their own personal outcome but the "invisible hand" effect in adding sand to the pile that is increasing systemic instability. According to Minsky, the longer such situation continues the more likely and violent an "avalanche".

The late Hunt Taylor wrote, in 2006:

"Let us start with what we know. First, these markets look nothing like anything I've ever encountered before. Their stunning complexity, the staggering number of tradable instruments and their interconnectedness, the light-speed at which information moves, the degree to which the movement of one instrument triggers nonlinear reactions along chains of related derivatives, and the requisite level of mathematics necessary to price them speak to the reality that we are now sailing in uncharted waters.

"... I've had 30-plus years of learning experiences in markets, all of which tell me that technology and telecommunications will not do away with human greed and ignorance. I think we will drive the car faster and faster until something bad happens. And I think it will come, like a comet, from that part of the night sky where we least expect it."

This is a gold age for bankers as Simon Johnson wrote in New Republic (The Next Financial Crisis ):

Banking was once a dangerous profession. In Britain, for instance, bankers faced “unlimited liability”--that is, if you ran a bank, and the bank couldn’t repay depositors or other creditors, those people had the right to confiscate all your personal assets and income until you repaid. It wasn’t until the second half of the nineteenth century that Britain established limited liability for bank owners. From that point on, British bankers no longer assumed much financial risk themselves.

In the United States, there was great experimentation with banking during the 1800s, but those involved in the enterprise typically made a substantial commitment of their own capital. For example, there was a well-established tradition of “double liability,” in which stockholders were responsible for twice the original value of their shares in a bank. This encouraged stockholders to carefully monitor bank executives and employees. And, in turn, it placed a lot of pressure on those who managed banks. If they fared poorly, they typically faced personal and professional ruin. The idea that a bank executive would retain wealth and social status in the event of a self-induced calamity would have struck everyone--including bank executives themselves--as ludicrous.

Enter, in the early part of the twentieth century, the Federal Reserve. The Fed was founded in 1913, but discussion about whether to create a central bank had swirled for years. “No one can carefully study the experience of the other great commercial nations,” argued Republican Senator Nelson Aldrich in an influential 1909 speech, “without being convinced that disastrous results of recurring financial crises have been successfully prevented by a proper organization of capital and by the adoption of wise methods of banking and of currency”--in other words, a central bank. In November 1910, Aldrich and a small group of top financiers met on an isolated island off the coast of Georgia. There, they hammered out a draft plan to create a strong central bank that would be owned by banks themselves.

What these bankers essentially wanted was a bailout mechanism for the aftermath of speculative crashes -- something more durable than J.P. Morgan, who saved the day in the Panic of 1907 but couldn’t be counted on to live forever. While they sought informal government backing and substantial government financial support for their new venture, the bankers also wanted it to remain free of government interference, oversight, or control.

Another destabilizing fact is so called myth of invisible hand which is closely related to the myth about market self-regulation. The misunderstood argument of Adam Smith [1776], the founder of modern economics, that free markets led to efficient outcomes, “as if by an invisible hand” has played a central role in these debates: it suggested that we could, by and large, rely on markets without government intervention. About "invisible hand" deification, see The Invisible Hand, Trumped by Darwin - NYTimes.com.

The concept of Minsky moment

The moment in the financial system when the quantity of debt turns into quality and produces yet another financial crisis is called Minsky moment. In other words the “Minsky moment” is the time when an unsustainable financial boom turns into uncontrollable collapse of financial markets (aka financial crash). The existence of Minsky moments is one of the most important counterargument against financial market self-regulation.  It also expose free market fundamentalists such as "former Maestro" Greenspan as charlatans. Greenspan actually implicitly admitted that he is and that it was he, who was the "machinist"  who helped to bring the USA economic train off the rails in 2008 via deregulation  and dismantling the New Deal installed safeguards. 

Here how it is explained by Stephen Mihm in Boston Globe in 2009 in the after math of 2008 financial crisis:

“Minsky” was shorthand for Hyman Minsky, an American macroeconomist who died over a decade ago.  He predicted almost exactly the kind of meltdown that recently hammered the global economy. He believed in capitalism, but also believed it had almost a genetic weakness. Modern finance, he argued, was far from the stabilizing force that mainstream economics portrayed: rather, it was a system that created the illusion of stability while simultaneously creating the conditions for an inevitable and dramatic collapse.

In other words, the one person who foresaw the crisis also believed that our whole financial system contains the seeds of its own destruction. “Instability,” he wrote, “is an inherent and inescapable flaw of capitalism.”

Minsky believed it was possible to craft policies that could blunt the collateral damage caused by financial crises. As economists re-embrace Minsky’s prophetic insights, it is far from clear that they’re ready to reckon with the full implications of what he saw.

Minsky theory was not well received due to powerful orthodoxy, born in the years after World War II, known as the neoclassical synthesis. The older belief in a self-regulating, self-stabilizing free market had selectively absorbed a few insights from John Maynard Keynes, the great economist of the 1930s who wrote extensively of the ways that capitalism might fail to maintain full employment. Most economists still believed that free-market capitalism was a fundamentally stable basis for an economy, though thanks to Keynes, some now acknowledged that government might under certain circumstances play a role in keeping the economy - and employment - on an even keel.

Economists like Paul Samuelson became the public face of the new establishment; he and others at a handful of top universities became deeply influential in Washington. In theory, Minsky could have been an academic star in this new establishment: Like Samuelson, he earned his doctorate in economics at Harvard University, where he studied with legendary Austrian economist Joseph Schumpeter, as well as future Nobel laureate Wassily Leontief.

But Minsky was cut from different cloth than many of the other big names. The descendent of immigrants from Minsk, in modern-day Belarus, Minsky was a red-diaper baby, the son of Menshevik socialists. While most economists spent the 1950s and 1960s toiling over mathematical models, Minsky pursued research on poverty, hardly the hottest subfield of economics. With long, wild, white hair, Minsky was closer to the counterculture than to mainstream economics. He was, recalls the economist L. Randall Wray, a former student, a “character.”

So while his colleagues from graduate school went on to win Nobel prizes and rise to the top of academia, Minsky languished. He drifted from Brown to Berkeley and eventually to Washington University. Indeed, many economists weren’t even aware of his work. One assessment of Minsky published in 1997 simply noted that his “work has not had a major influence in the macroeconomic discussions of the last thirty years.”

Yet he was busy. In addition to poverty, Minsky began to delve into the field of finance, which despite its seeming importance had no place in the theories formulated by Samuelson and others. He also began to ask a simple, if disturbing question: “Can ‘it’ happen again?” - where “it” was, like Harry Potter’s nemesis Voldemort, the thing that could not be named: the Great Depression.

In his writings, Minsky looked to his intellectual hero, Keynes, arguably the greatest economist of the 20th century. But where most economists drew a single, simplistic lesson from Keynes - that government could step in and micromanage the economy, smooth out the business cycle, and keep things on an even keel - Minsky had no interest in what he and a handful of other dissident economists came to call “bastard Keynesianism.”

Instead, Minsky drew his own, far darker, lessons from Keynes’s landmark writings, which dealt not only with the problem of unemployment, but with money and banking. Although Keynes had never stated this explicitly, Minsky argued that Keynes’s collective work amounted to a powerful argument that capitalism was by its very nature unstable and prone to collapse. Far from trending toward some magical state of equilibrium, capitalism would inevitably do the opposite. It would lurch over a cliff.

This insight bore the stamp of his advisor Joseph Schumpeter, the noted Austrian economist now famous for documenting capitalism’s ceaseless process of “creative destruction.” But Minsky spent more time thinking about destruction than creation. In doing so, he formulated an intriguing theory: not only was capitalism prone to collapse, he argued, it was precisely its periods of economic stability that would set the stage for monumental crises.

Minsky called his idea the “Financial Instability Hypothesis.” In the wake of a depression, he noted, financial institutions are extraordinarily conservative, as are businesses. With the borrowers and the lenders who fuel the economy all steering clear of high-risk deals, things go smoothly: loans are almost always paid on time, businesses generally succeed, and everyone does well. That success, however, inevitably encourages borrowers and lenders to take on more risk in the reasonable hope of making more money. As Minsky observed, “Success breeds a disregard of the possibility of failure.”

As people forget that failure is a possibility, a “euphoric economy” eventually develops, fueled by the rise of far riskier borrowers - what he called speculative borrowers, those whose income would cover interest payments but not the principal; and those he called “Ponzi borrowers,” those whose income could cover neither, and could only pay their bills by borrowing still further. As these latter categories grew, the overall economy would shift from a conservative but profitable environment to a much more freewheeling system dominated by players whose survival depended not on sound business plans, but on borrowed money and freely available credit.

Once that kind of economy had developed, any panic could wreck the market. The failure of a single firm, for example, or the revelation of a staggering fraud could trigger fear and a sudden, economy-wide attempt to shed debt. This watershed moment - what was later dubbed the “Minsky moment” - would create an environment deeply inhospitable to all borrowers. The speculators and Ponzi borrowers would collapse first, as they lost access to the credit they needed to survive. Even the more stable players might find themselves unable to pay their debt without selling off assets; their forced sales would send asset prices spiraling downward, and inevitably, the entire rickety financial edifice would start to collapse. Businesses would falter, and the crisis would spill over to the “real” economy that depended on the now-collapsing financial system.

From the 1960s onward, Minsky elaborated on this hypothesis. At the time he believed that this shift was already underway: postwar stability, financial innovation, and the receding memory of the Great Depression were gradually setting the stage for a crisis of epic proportions. Most of what he had to say fell on deaf ears. The 1960s were an era of solid growth, and although the economic stagnation of the 1970s was a blow to mainstream neo-Keynesian economics, it did not send policymakers scurrying to Minsky. Instead, a new free market fundamentalism took root: government was the problem, not the solution.

Moreover, the new dogma coincided with a remarkable era of stability. The period from the late 1980s onward has been dubbed the “Great Moderation,” a time of shallow recessions and great resilience among most major industrial economies. Things had never been more stable. The likelihood that “it” could happen again now seemed laughable.

Yet throughout this period, the financial system - not the economy, but finance as an industry - was growing by leaps and bounds. Minsky spent the last years of his life, in the early 1990s, warning of the dangers of securitization and other forms of financial innovation, but few economists listened. Nor did they pay attention to consumers’ and companies’ growing dependence on debt, and the growing use of leverage within the financial system.

By the end of the 20th century, the financial system that Minsky had warned about had materialized, complete with speculative borrowers, Ponzi borrowers, and precious few of the conservative borrowers who were the bedrock of a truly stable economy. Over decades, we really had forgotten the meaning of risk. When storied financial firms started to fall, sending shockwaves through the “real” economy, his predictions started to look a lot like a road map.

“This wasn’t a Minsky moment,” explains Randall Wray. “It was a Minsky half-century.”

Minsky is now all the rage. A year ago, an influential Financial Times columnist confided to readers that rereading Minsky’s 1986 “masterpiece” - “Stabilizing an Unstable Economy” - “helped clear my mind on this crisis.” Others joined the chorus. Earlier this year, two economic heavyweights - Paul Krugman and Brad DeLong - both tipped their hats to him in public forums. Indeed, the Nobel Prize-winning Krugman titled one of the Robbins lectures at the London School of Economics “The Night They Re-read Minsky.”

Today most economists, it’s safe to say, are probably reading Minsky for the first time, trying to fit his unconventional insights into the theoretical scaffolding of their profession. If Minsky were alive today, he would no doubt applaud this belated acknowledgment, even if it has come at a terrible cost. As he once wryly observed, “There is nothing wrong with macroeconomics that another depression [won’t] cure.”

But does Minsky’s work offer us any practical help? If capitalism is inherently self-destructive and unstable - never mind that it produces inequality and unemployment, as Keynes had observed - now what?

After spending his life warning of the perils of the complacency that comes with stability - and having it fall on deaf ears - Minsky was understandably pessimistic about the ability to short-circuit the tragic cycle of boom and bust. But he did believe that much could be done to ameliorate the damage.

To prevent the Minsky moment from becoming a national calamity, part of his solution (which was shared with other economists) was to have the Federal Reserve - what he liked to call the “Big Bank” - step into the breach and act as a lender of last resort to firms under siege. By throwing lines of liquidity to foundering firms, the Federal Reserve could break the cycle and stabilize the financial system. It failed to do so during the Great Depression, when it stood by and let a banking crisis spiral out of control. This time, under the leadership of Ben Bernanke - like Minsky, a scholar of the Depression - it took a very different approach, becoming a lender of last resort to everything from hedge funds to investment banks to money market funds.

Minsky’s other solution, however, was considerably more radical and less palatable politically. The preferred mainstream tactic for pulling the economy out of a crisis was - and is - based on the Keynesian notion of “priming the pump” by sending money that will employ lots of high-skilled, unionized labor - by building a new high-speed train line, for example.

Minsky, however, argued for a “bubble-up” approach, sending money to the poor and unskilled first. The government - or what he liked to call “Big Government” - should become the “employer of last resort,” he said, offering a job to anyone who wanted one at a set minimum wage. It would be paid to workers who would supply child care, clean streets, and provide services that would give taxpayers a visible return on their dollars. In being available to everyone, it would be even more ambitious than the New Deal, sharply reducing the welfare rolls by guaranteeing a job for anyone who was able to work. Such a program would not only help the poor and unskilled, he believed, but would put a floor beneath everyone else’s wages too, preventing salaries of more skilled workers from falling too precipitously, and sending benefits up the socioeconomic ladder.

While economists may be acknowledging some of Minsky’s points on financial instability, it’s safe to say that even liberal policymakers are still a long way from thinking about such an expanded role for the American government. If nothing else, an expensive full-employment program would veer far too close to socialism for the comfort of politicians. For his part, Wray thinks that the critics are apt to misunderstand Minsky. “He saw these ideas as perfectly consistent with capitalism,” says Wray. “They would make capitalism better.”

But not perfect. Indeed, if there’s anything to be drawn from Minsky’s collected work, it’s that perfection, like stability and equilibrium, are mirages. Minsky did not share his profession’s quaint belief that everything could be reduced to a tidy model, or a pat theory. His was a kind of existential economics: capitalism, like life itself, is difficult, even tragic. “There is no simple answer to the problems of our capitalism,” wrote Minsky. “There is no solution that can be transformed into a catchy phrase and carried on banners.”

It’s a sentiment that may limit the extent to which Minsky becomes part of any new orthodoxy. But that’s probably how he would have preferred it, believes liberal economist James Galbraith. “I think he would resist being domesticated,” says Galbraith. “He spent his career in professional isolation.”

Stephen Mihm is a history professor at the University of Georgia and author of “A Nation of Counterfeiters” (Harvard, 2007). © Copyright 2009 Globe Newspaper Company.

 

Some important albeit random (and overlapping) points about instability of financial system

The first thing to understand is that attempt to weaken positive feedback looks via regulation, approach that can be called  “regulation as a Swiss knife” does not work without law enforcement and criminal liability for bankers, as there is an obvious problem of corruption of regulators. In this sense the mechanism of purges might be the only one that realistically can work.

In other words it’s unclear who and how can prevents the capture of regulators as financial sector by definition has means to undermine any such efforts. One way this influence work is via lobbing for appointment of pro-financial sector people in key positions. If such "finance-sector-selected" Fed chairman does not like part of Fed mandate related to regulation it can simply ignore it as long as he is sure that he will be reappointed. That happened with Greenspan.  After such process started it became irreversible and only after a significant, dramatic shock to the system any meaningful changes can be instituted and as soon as the lessons are forgotten work on undermining them resumes.

In essence, the Fed is a political organization and Fed Chairman is as close to a real vice-president of the USA as one can get.  As such Fed Chairman serves the elite which rules that country, whether you call them financial oligarchy or some other name. Actually Fed Chairman is the most powerful unelected official in the USA. If you compare this position to the role of the Chairman of the Politburo  in the USSR you’ll might find some interesting similarities.

In other words it is impossible to prevent appointment of another Greenspan by another Reagan without changes in political power balance.  And the transition to banana republic that follows such appointment is irreversible even if the next administration water boards former Fed Chairman to help him to write his memoirs.  That means that you need to far-reaching reform of political system to be able to regulate financial industry and you need to understand that the measures adopted need vigilant protection as soon as the current crisis is a distant history.

Additional reading

Several other source of financial instability were pointed out by others:

There are some outstanding lectures and presentation on YouTube on this topic. Among them:

See an expended list at Webliography of heterodox economists

Dr. Nikolai Bezroukov


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[Mar 24, 2017] Are Empirical Economists Idiot Savants?

Notable quotes:
"... Only the people who understand both the data and its limitations, and not get lost in the illusion of precision ..."
"... Shiller describes many modern economists and market observers as idiot-savants; truth be told, when using that phrase he is only half right. ..."
www.ritholtz.com

By Barry Ritholtz - November 21st, 2010, 8:31AM

The Economist asks: "Fifty years after the dawn of empirical financial economics, is anyone the wiser?"

My short answer: "Only the people who understand both the data and its limitations, and not get lost in the illusion of precision."

Markets are driven by myriad factors, most of which are readily quantifiable. But the small number of inputs that do not lend themselves to easy modeling is how certain empiricists get themselves into trouble. They believe their models accurately account for the real world, when they do not.

One would imagine that the parade of Black Swan events that keep upending their models would convince these economists otherwise, but you would be surprised at how foolishly stubborn these folks are.

The EMH proponents, the VAR analysts, the "stocks for the long run" folks - the grim reality of their performance has not dissuaded them from their beliefs. This has Yale Professor Robert Shiller concerned:

"[Shiller] worries that academic departments are "creating idiot savants, who get a sense of authority from work that contains lots of data". To have seen the financial crisis coming, he argues, it would have been better to "go back to old-fashioned readings of history, studying institutions and laws. We should have talked to grandpa."

Shiller puts his finger on the right pressure point. The factors ignored by the quants were the underlying changes in laws and regulations. That allowed banks to run wild, something the pure quants were not prepared to detect and act upon. The radical deregulation of the past 3 decades was the equivalent of dark matter, undetectable by Newtonian physics - or quant trading funds.

Shiller describes many modern economists and market observers as idiot-savants; truth be told, when using that phrase he is only half right.

Here is the Economist:

IT ALL began with a phone call, from a banker at Merrill Lynch who wanted to know how investors in shares had performed relative to investors in other assets. I don't know, but if you gave me $50,000 I could find out, replied Jim Lorie, a dean at the University of Chicago's business school, in so many words. The banker, Louis Engel, soon agreed to stump up the cash, and more. The result, in 1960, was the launch of the university's Centre for Research in Security Prices. Half a century later CRSP (pronounced "crisp") data are everywhere. They provide the foundation of at least one-third of all empirical research in finance over the past 40 years, according to a presentation at a symposium held this month. They probably influenced much of the rest. Whether that is an entirely good thing has become a matter of debate among economists since the financial crisis.

It is an interesting article worth perusing . . .

Source:
Data birth
Economist Nov 18th 2010
http://www.economist.com/node/17519706?story_id=17519706

34 Responses to "Are Empirical Economists Idiot Savants?"

KentWillard: November 21st, 2010 at 8:51 am

My personal experience has been that most 'quants' in Finance don't have economics degrees. Often a PhD in Physics. Sometimes in Math, sometimes in Finance. Many aren't from the US, or even the West. They don't have an understanding, or often interest in markets. They can sure run a lot of simulations quickly though.

machinehead : November 21st, 2010 at 8:53 am

'Shiller puts his finger on the right pressure point. The factors ignored by the quants were the underlying changes in laws and regulations.'

To these factors, I would add the cyclical analysis described in a Big Picture post about Felix Zulauf a couple of days ago. Quantitative models do a pretty good job of identifying 'late expansion phase' syndrome: bubbly equity markets, loose credit standards, tightening capacity, persistent inflation (properly measured).

But every time, economists as a group say that the Federal Reserve will achieve a soft landing, and recession will be averted. Many of them are saying this now about China, currently manifesting 'late expansion phase' syndrome with a vengeance.

Why are economists so poor at reading the business cycle? I'd contend that most of them are conflicted. Their paychecks come from corporate entities who don't want to hear recession forecasts. Federal Reserve economists certainly aren't going to bite the FOMC's guiding hand. Academic economists should be freer, you'd think, but some have corporate research funding. Robert Schiller at Yale was one of the few (with Irrational Exuberance, January 2000) to get a cyclical peak right.

Behavioral economics says that economists, like every other cohort, will be victims of groupthink at inflection points, always zigging when they should zag. This is the tragedy of the Federal Reserve's interest rate central planners. Never will they succeed at day-trading this vast economy into prosperity. They've spectacularly failed at even the much narrower task of enriching their client banking cartel at the expense of everyone else.

Here's hoping that B.S. 'Benny Bubbles' Bernanke will be history's last Fed chairman.

ToNYC: November 21st, 2010 at 9:02 am

Granpa knew that Moral Authority took care of business and was worth more to effect continuity or change than any manipulation of currency or credit. JP Morgan knew that Lending was all about Character and told Congress that other factors were secondary. Quants know how to manipulate data and the value of nothing.

Opir: November 21st, 2010 at 9:27 am

If we accept, for the sake of argument, that economics is really 90% mass psychology, 10% math, then isn't a large part of the issue that many of its professional practitioners have tried to understand problems though a lens where those percentages are reversed? There is perhaps kind of bias that causes many of these people to only see the world using neat models, and discount that what economics is really about trying to understand (once you get beyond the simple cases where said models and standard ideas about incentives work):

what people do and want to do; how many of them do it; and for how long, modified by:

1) geopolitical events 2) the zeitgeist 3) culture (and subculture)

People may go into the field with a love of numbers and an interest in money; what we may really need, however, are people who care about understanding human behavior as it pertains to resources and power within and between societies. A "sociology for money", as it were.

Go Dog Go: November 21st, 2010 at 9:27 am

Shiller describes many modern economists and market observers as idiot-savants; truth be told, when using that phrase he is only half right.

I just got that. Very funny

Mark E Hoffer: November 21st, 2010 at 9:42 am

funny, the Argument, ~"over-reliance on imperfect Models/questionable Data", is, no doubt, True..

though, substitute "AGW/"Climate Change" for "Econometrics/Financial Engineering" and . ~~

differently, Economists, of course, should be snorting more *Exhaust Fumes, and less Laser Toner..

billkeep: November 21st, 2010 at 9:42 am

There are empiricists and then there are empiricists. A quick look at Reinhart and Rogoff's book "This Time Is Different," shows the incestual limitation of quant jocks (whether trained in econ or physics or math - it's all the same because they use the same tired data) and the power that can come from fresh data, fresh thinking, and an absence of self-interest in the outcome (see Folbre's piece on the ethics of economists in the NYT Economix column).

Bill W: November 21st, 2010 at 9:47 am

Despite our great triumphs of science and advances in understanding, we still don't know jack about the universe. I believe in the constant advance of knowledge, but I also believe in being realistic.

We need to be prudent when we apply our theories about the world to the real world. The results can be disappointing.

What's much worse than a fool? A fool with ambition.

How the Common Man Sees It Says:

November 21st, 2010 at 10:08 am The fact is, if you pay people to look the other way, they usually do.

mhdoc: November 21st, 2010 at 10:14 am

Many years ago I was a biology graduate student when we got our first computer terminal and I discovered the joys of stepwise regression. I spent hours searching out the last 5% of the variance. Then I went on my first field trip of the season to check on the rainfall collectors I had randomly scattered through the forest. We measured the dissolved elements in the water we collected; parts per million potassium, etc.

One of the collectors had gotten plugged, filled with water, and a thirsty chipmunk had fallen in and drowned. In addition, the water was covered with pollen. Suddenly the value of stepwise regression for explaining what was going on took a serious hit. I guess my black swan looked like a chipmunk :)

Bill W: November 21st, 2010 at 10:26 am

billkeep, I like what you said about fresh thinking and and absence of self-interest. How often do "data driven," "open-minded," scientists become high priests of their own theories. They will put down traditional religious beliefs, without realizing the dogma of their own thinking. There will always be religion of some sort in this world, whether the practitioners realize it or not.

I think the quants are probably missing a healthy dose of the applied knowledge of experienced investors. You don't have to be able to mathematically formulate why something works to understand that it does. How do you separate the quack theories from the real ones? If I knew that I'd be considerably wealthier.

farmera1: November 21st, 2010 at 10:34 am

Misuse of statistics by economist/quants is a root cause of our recent meltdown.

Seeing the world and economics as a normal/Gaussian/bell curve world (it isn't in most cases) will lead you to a path of unforeseen and destructive events. You end up making all kinds of risk assessments and predictions that are built upon "facts/Gaussian models/bell curve" that just don't reflect the real world. Some big unpredicted event will get you.

For example thinking (and building an investment house of cards) just because models show you that the real estate market never goes down (nation wide) that it will never happen is a fool's approach, but it built huge bonuses (say a cool $100,000,000/yr for several) for the executives so in that sense it was successful. It also made the Ownership Society possible. It allowed this country to live way beyond its means for years so most benefited. Cut taxes and start wars, no problem, we got this baby humming. Since we were able to predict and control risk so well who needs regulations. Leverage, no problem, we have it under control (aka being fully hedged). RIGHT.

By the way the social sciences do the same thing, in using things like ANV, standard deviations, risk, relative error (?)etc. This misuse is just as big in its' own way as the quants/economists' errors.

Petey Wheatstraw: November 21st, 2010 at 11:12 am

"Markets are driven by myriad factors, most of which are readily quantifiable." _______________

The least quantifiable of which is direct intervention in, and manipulation by, central bankers. The markets are rigged. Quantify THAT, bitch.

(sorry for the last sentence, not aimed at anyone.)

~~~

BR: $600 Billion dollars over 6-9 months.

Mark E Hoffer: November 21st, 2010 at 11:35 am

though, speaking of 'Empiricists', these cats http://www.gapminder.org/ offer some interesting analytics, esp. here http://www.gapminder.org/labs/

as per, YMMV, YOMP ..

louis: November 21st, 2010 at 11:38 am

There are a myriad of factors that set a point spread.

Sechel: November 21st, 2010 at 11:55 am

There's an old joke about the drunk economists looking for his keys by the light post even though they were lost elsewhere, when asked he responded, "because this is where the light is

The market seems intent on assuming the market operates under the efficient market hypothesis, price distribution is normal and that participants always act rationally. Nothing could be further from the truth. Mandelbrot discussed how observations of Cotton price movements disproved this. We know there is information asymmetry in the marketplace.

The market knows what models to use, it just chooses not to. It's beyond fat tails, it requires extreme value theory, knowing that risk scales at the extremes and that bad news comes in threes(dependence).

So why use the failed tools, the answer is simple. If the market gives up on OAS, Black-Scholes and the like, it has to accept being in the dark more than it's used to.

Sechel: November 21st, 2010 at 12:02 pm

Barry, the mortgage market learned that VAR does not work, that OAS is a terrible tool. Many have turned to scenario analysis, but a great deal many like the simplicity of the old failed tools.

daf48: November 21st, 2010 at 12:12 pm

"most of which are readily quantifiable" Really? I'd be careful if that was my point of view. Economic reality is compiled by using data points from thousands of governments, corporate think tanks, independent agencies, etc'. But little work has been done to look at the system as a whole. Or better yet. is there a global economic system?

Uchicagoman: November 21st, 2010 at 12:18 pm

http://en.wikipedia.org/wiki/Dimensional_Fund_Advisors

Uchicagoman: November 21st, 2010 at 12:22 pm

$190 billion under management.

RW: November 21st, 2010 at 12:28 pm

IMO your "short answer" is spot on BR: The illusion of precision is a major problem not only because the data are limited or much more granular than suspected - e.g., the fact that price can be recorded down to the penny does not mean that is where the significant digit is - but also because increased precision cannot significantly improve predictability of system behavior if nonlinear factors are present.*

*this was a key insight of the meteorologist Edward Lorenz, one of the first 'chaos' theoreticians (1963), that and the sensitivity of even the best model simulations to minute changes in initial conditions (butterfly effect).

Uchicagoman: November 21st, 2010 at 12:38 pm

Here's an old (physics?) saying:

"You can either dazzle me with data, or butter me with bullshit."

b_thunder: November 21st, 2010 at 3:16 pm

"[Shiller] worries that academic departments are "creating idiot savants, who get a sense of authority from work that contains lots of data".

I wonder who Shiller had in mind? How about that guy who used to go over massive amounts of data while in his bathtub? Remember the Maestro? And another one who says we're under threat of deflation (according to statisticians) and who doesn't see that other than houses and flat-screen TVs, prices for everything else are rising in the real world. The one who thinks that because cost of gasoline and food are not in his data tables and charts, they do not matter. The one who thinks that in times of 17% U6 un/under-employment and massive outsourcing wages will rise and people will get hired if prices go up.

I also wonder what Barry's buddy "Invictus" thinks about all this. He seems to trust the charts and data more than the real world sentiment.

Sechel: November 21st, 2010 at 4:01 pm

Who can believe anything they say. With one breadth they tell us quantitative easing is meant to spur bank lending, then they pay banks on their reserves encouraging them not to lend those same reserves out. As far as the Fed goes, no credibility.

Julia Chestnut: November 21st, 2010 at 4:02 pm

You know, BR, the best economics class I had during my graduate studies was econometrics. The thing that was so good about it (and so incredibly annoying at the time) was that the prof made us work the matrix algebra from the ground up in building regression analyses. We were going to be using computers to regress the data - but he was adamant that unless you understood the math, and knew exactly what the math was doing with the data we input, you would have no idea what the limitations of the analysis were. He also insisted that we understand the limitations of the data – how it was collected, what it meant. I've used that course at least weekly since I graduated embarrassingly long ago (unlike "finance," where I at least learned that derivatives are for hedging, not investing).

I'd say that either a true statistician or an applied mathematician for a quant is the way to go. I meet loads of economists who couldn't figure their way out of a paper bag. Know what's worse, though? The number of MDs with less than a clue about the math underlying normative numbers in lab tests. I'm less likely to get killed by a quant.

TerryC: November 21st, 2010 at 4:07 pm

"Only the people who understand both the data and its limitations, and not get lost in the illusion of precision."

Barry, I think you mean accuracy.

billkeep: November 21st, 2010 at 4:08 pm

Bill W

Actually if you knew that you wouldn't be wealthy. You would only be wealthy if you knew it first and with enough time to act in your own interests. There is a unreconcilable difference of purpose between public and private interests when it comes to understanding markets. As Sechel says We know there is information assymetry in the marketplace. In fact, we bet on it. The problem we seem to now have is that a few analysts who do understand the psychology of investors or not "public" analysts. As a result, the public analysts lag behind because they have been trained too narrowly in terms of the data and lack the understanding of investor behavior. That is the way it appears to me anyway.

constantnormal: November 21st, 2010 at 5:35 pm

As in most things, the quality of the question says more than the completeness of the answer.

Andy T: November 21st, 2010 at 6:35 pm

Opir@9.27 AM

Amen to that my friend.

What many people lose sight of is the fact that we humans tend to move in "excesses." First there is excessive greed which causes asset bubbles, then comes the excessive fear after the bubble bursts.

This has been going on for several hundred years, regardless of regulatory structure.

And, you know what?

That's OK. It is it what it is

Attempts to "modify" human behavior or attempts to disrupt the natural flow of things will have it's own unintended consequences.

ezrasfund: November 21st, 2010 at 7:21 pm

So right. You can build a giant edifice of precise calculations. But so often that edifice is build on a foundation of vague assumptions such as "housing prices won't go down."

RodgerMitchell: November 21st, 2010 at 7:26 pm

All the mathematical formulas in the world are trumped by the simple fact that the U.S. is monetarily sovereign.

1. It does not need to borrow

2. It can pay for any deficits of any size, without raising taxes

3. It never should engage in "austerity."

4. It cannot be forced into bankruptcy, nor can any of its agencies (i.e. Social Security, Medicare et al) be forced into bankruptcy. .

Spending by the U.S. neither is constrained by taxes and borrowing, nor is it even related to taxes and borrowing. Either can be done or eliminated without affecting the other. That is, taxing does not affect spending, and spending does not affect taxing. They, in fact, are two, unrelated operations. . The sole constraint on federal spending is inflation. We are nowhere near inflation, and it easily can be prevented and cured with interest rate control. . Those who do not understand monetary sovereignty do not understand economics. .

Rodger Malcolm Mitchell

Mark E Hoffer: November 21st, 2010 at 7:35 pm

RMM,

aren't you overlooking http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=Federal+Reserve+Act+of+1913 ?

and, because of such, it, actually, "does need to borrow", contra to your first assertion..(?)

soloduff: November 21st, 2010 at 9:50 pm

The author exhibits an elementary conceptual confusion. Financial economics (of the EMH/Modern Portfolio fame) is not "empirical" economics. Rather, it is based upon analogy with 19th century statistical mechanics; hence its fetish of the bell curve ("normal distribution"), which fails as a benchmark in every crisis. B. Mandlebrot and E. Derman have written extensively on this genre of economics; which differs from mainstream ("neoclassical" a la Samuelson et al.) only inasmuch as neoclassical economics takes its metaphor from an even more antiquated department of 19th century physics, namely, "rational mechanics"–remember your Econ 101 text's proud mention of the "production function" (Cobb-Douglas) and the Lagrangian multiplier? About 15 years ago Philip Mirowski wrote an expose of the neoclassical analogy–"More Heat Than Light"–demonstrating conclusively that the luminaries of economics understood neither the physics that they borrowed nor the economics that they data-fitted to their analogy. (Ditto with financial economics in the critiques provided by Mandlebrot and Derman.) –Oh, well, should we expect scholarly accuracy from a mere financial reporter when the scholars themselves serve up such wanton slop? In a word: All idiots, no savants.

CitizenWhy: November 21st, 2010 at 10:32 pm

Empirical economists are idiot savants only in regard to economics. In other things they are probably OK.

[Mar 23, 2017] The difference between Obamacare and AHCA is 24 million uninsured people while the difference between single-payer and Obamacare is 28 million uninsured people

Mar 23, 2017 | economistsview.typepad.com
Peter K. : Reply Thursday, March 23, 2017 at 05:54 AM , March 23, 2017 at 05:54 AM
Reminds me of PGL, EMichael, "Anachronism" etc.

https://lbo-news.com/2017/03/22/never-demand/

Never Demand
by Doug Henwood
March 22, 2017

Matt Bruenig already wrote* about this (now deleted) tweet from Paul Waldman, which was a response to one from Bernie Sanders

Paul Waldman: Like saying "Never lose sight of the fact that our goal is to remodel the kitchen" when there are arsonists pouring gasoline on your porch."

Bernie Sanders: "Never lose sight of the fact that our ultimate goal is not just playing defense. Our goal is a Medicare-for-all, single payer system."

and before typing any more, I must confess to feeling guilty about writing a second blog post (god knows there are probably more) about a tweet. But, onwards.

As Bruenig writes, "The difference between Obamacare and AHCA is 24 million uninsured people while the difference between single-payer and Obamacare is 28 million uninsured people." Obamacare, with all its omissions and cost-shifting, isn't innocent of monstrousness.

There's a point about political strategy here worth drawing out here. Waldman, who self-identifies as "Washington Post blogger. Columnist for The Week. Senior Writer at the American Prospect.," was on the Cabalist, a secret listserv for liberal pundits which I strangely spent two or three years on. (I assume he still is, though I can't know now that I'm off the thing.) I was invited on, I suppose, for ideological diversity, but left as what most members probably saw as an annoying provocateur.

Waldman's tweet reflects a consensus on the list that one must never make demands or express ambitious political goals in the way Sanders' tweet does. All we can do it defend what we have, because the right holds all the cards. I never could convince them that this was a doomed strategy-that, principle aside, if you don't make big demands you can't win even small victories, or that without radicals pushing things in threatening ways their wimpy appeals to compromise will have no audience. To your modal Cabalister, to push for single-payer would be to "relitigate" (a favorite word of theirs, reflecting I suspect their preference for litigation over actual politics) Obamacare, and so expose it to repeal. That was their line a couple of years ago, when no one could have imagined President Trump. Now that it is under the threat of repeal, it's more urgent than ever to assume a defensive crouch.

You can see this sort of thinking behind the Democrats' responses to Trump. They're still stuck in the Hillary mode of treating him as an anomaly, something different from a "normal" Republican. They obsess about his alleged Russia ties, but offer nothing as a serious alternative to the Trump (or Ryan) agenda.

Obamacare has never been so popular now that it may go away. Millions of people have gotten something good out of it, as flawed as it is. Imagine how popular a program that offered everyone full coverage would be.

* https://medium.com/@MattBruenig/opponents-of-single-payer-are-moral-monsters-on-par-with-ahca-proponents-c6c152b18bd5#.2f52xubwb

JohnH -> Peter K.... , March 23, 2017 at 07:35 AM
Democrats play defense so much that occasionally they score on goals..handing victories to opponents because they could no effective offense of their own.

Imagine where Democrats could be if they deigned to talk to workers, actively pushed for higher minimum wages, and crafted a coherent economic message that spoke to "people who work hard and play by the rules."

Not going to happen: the corrupt, sclerotic Democratic leadership has grown comfy playing Washington General to Republicans' Harlem Globetrotter. They even refuse to sack a leadership who has lost most everything between the coasts.

Fortunately for them, we live in a duopoly, so there is always a place for the losing team.

RC AKA Darryl, Ron said in reply to JohnH... , March 23, 2017 at 08:19 AM
Yep.
im1dc -> JohnH... , March 23, 2017 at 08:57 AM
Dittos, and S. Sanders proved it last year. Why it is taking the current DEM leadership so long to put the lesson learned into action is beyond me and it angers me too.
RC AKA Darryl, Ron said in reply to Peter K.... , March 23, 2017 at 08:18 AM
Excellent article.
T : , March 23, 2017 at 06:12 AM
When the history is written, the Clinton Administration (and the Brad DeLongs in it) will be remembered for 4 things:

1) a massive increase in inequality carrying on the tradition began by Reagan;

2) incarcerating a large and increasing share of the black male population causing unfathomable damage to the black community;

3) passing a welfare reform package that was both cruel and unproductive to the least fortunate in our society;

4) negotiating and cheer-leading a Chinese trade deal that led to the loss of at least three million manufacturing jobs, primarily in the Midwest, and the destruction of community after community. And laying the seeds for those Democratic states to turn Republican.

Meanwhile Brad continues to let his "neoliberal freak flag fly."

painer -> T... , March 23, 2017 at 06:24 AM
Liberal consciences

Attend to this indictment

Peter K. -> T... , March 23, 2017 at 06:26 AM
So true. Also on macro policy he bent the knee to Greenspan/The Fed/the bond market, dumping his fiscal expansion campaign promise in exchange for deficit reduction.

Democrats have become all about deficit reduction and "the era of big government is over."

It is interesting to listen to David Beckworth's interview with Jason Furman who expresses the conventional thinking of Democrats.

Fiscal expansion is now good and desired within the context of the Zero Lower Bound and how unconventional monetary policy supposedly doesn't work.

But still they are okay with the Fed being paranoid about inflation, another legacy of the Clinton era.

Clinton did deliver a brief moment of a high-powered economy at the end of the 90s as Greenspan held off on raising rates.

But he also gave us the dot.com bubble with a push for deregulation, exemplified by repealing Glass-Steagall on behalf of the financial sector, the same people who would give us an epic financial crisis.

And Clinton was never big on union/organizing rights or anti-trust. He signed the Defense of Marriage Act etc etc etc.

But hey he was better than Republicans!

[Mar 23, 2017] Understanding the Republicans' corporate tax reform

Mar 23, 2017 | economistsview.typepad.com
RC AKA Darryl, Ron : March 22, 2017 at 04:28 AM , 2017 at 04:28 AM
[Maybe Brookings also needs to be taken with a grain of salt, but this is the best article on the DBCFT that I have found so far.]


https://www.brookings.edu/opinions/understanding-the-republicans-corporate-tax-reform/

Understanding the Republicans' corporate tax reform

William G. Gale·

Tuesday, January 10, 2017

Republicans in the House are proposing sweeping corporate tax reform. Their proposals would effectively repeal the corporate income tax, currently levied at a 35 percent rate, and replace it with a new "destination-based cash-flow tax (DBCFT)" at a 20 percent rate for corporations and 25 percent for unincorporated businesses. The new tax would be border-adjustable – taxing imports and exempting exports.

The DBCFT has a lot to offer and it deserves a serious look. But right now, the overall proposal is very poorly understood. Here are 11 things to know:


1.The truly radical part is the proposal to effectively abolish the corporate income tax. The United States would become the only advanced country without a corporate income tax, making it a very attractive location for international investors.


2.The DBCFT is essentially a value-added tax (VAT), but with a deduction for wages. Every advanced country except the U.S. has a VAT alongside a corporate income tax. The U.S. would in effect be replacing the corporate income tax with a modified VAT. A VAT taxes consumption, not income – it has the same effects as a national retail sales tax, but works better administratively.


3.Unlike the corporate income tax, the DBCFT would not distort investment or financing choices. Instead, it would eliminate taxes on the returns to investment and would treat debt and equity equally. It would also eliminate all transfer-pricing issues and incentives to shift profits and profitable activities offshore.


4.However, precisely because the DBCFT does not have the negative incentive effects of the corporate income tax, there is no good reason to reduce the tax rate to 25/20 percent. Indeed, the tax rate should be equal to the top rate on individual income, so as to reduce incentives to reclassify wage income as business income.

5.Border adjustment of a VAT is not some wild, radical idea. It is a natural and logical part of the tax. All advanced countries with VATs employ border adjustments. In order to focus the tax on domestic consumption, the VAT should exempt exports – which are consumed abroad – and tax imports – which are consumed here. Again, exactly like a retail sales tax.

6.Many economists – but very few non-economists – believe that the international trade effects of border adjustments will be small. In this view, taxing all imports and exempting all exports will raise the value of the dollar relative to other currencies. To a first approximation, this will leave the level of imports and exports the same under the DBCFT as they would have been without the tax. Border adjustments alone should not be expected to change the trade balance. For all of the reasons, there should be no expectation that the domestic price level will change.


7.The deduction for wages makes the DBCFT progressive, relative to a VAT. It only taxes consumption financed out of holdings of capital, whereas a VAT burdens all consumption. The new tax would also plausibly be more progressive than the current corporate income tax, because it would not discourage domestic investment. The investment disincentives in the current corporate tax reduce capital per worker and hence reduce wages.


8.One potentially thorny issue is that the DBCFT may create negative net tax liability for some very big, very profitable exporters. The DBCFT will only work as intended if those exporters get full rebates, even if that means Treasury has to write them a check. This is likely to create a serious "optics" problem, given that many people think that big, profitable corporations should be required to pay taxes. Likewise, the DBCFT will raise tax payments for importers. These are all perception issues, however; the border adjustment won't affect the after-tax profitability of either exporters or importers, because of the exchange rate adjustment.


9.A second issue is that border adjustment and the resulting exchange rate appreciation will reduce the value of American investments overseas.


10.Another downside is that the World Trade Organization (WTO) allows border adjustments for VATs but not for income taxes. The wage deduction makes the DBCFT look like an income tax (wages are deductible, for example, under the corporate income tax). Many experts believe this would make the DBCFT, as currently proposed, incompatiblewith WTO rules. If that were the case, either: a new deduction or credit for wages could be created elsewhere in the tax system; the wage deduction could be dropped, making the DBCFT revert to a VAT (which would make it more regressive); or the border adjustment could be dropped, which would reintroduce incentives for firms to shift profits and productive activities abroad.


11.A final concern is that the corporate reform proposals described above, even when coupled with some specified corporate tax revenue-raisers, would reduce federal tax revenue by about $900 billion over the next 10 years on a static basis. Revenues would fall by somewhat less if the changes were dynamically scored, but the proposals would still represent a very large tax cut and would raise the public debt.

Rough estimates suggest that setting the DBCFT rate at around 30 percent for all businesses would eliminate the revenue shortfall. This would still leave it lower than the current corporate rate or the top individual tax rate, and suggests that an even higher DBFCT rate, coupled with a reduction in the top individual income tax rate, could equate the top individual and business rates and still be revenue-neutral and probably fairly close to distributionally-neutral.

The corporate tax is ripe for reform. The DBFCT is an excellent way to kick-start the needed discussion.


*

[You might say that all of my concerns are wrapped up in item number 10. IOW, the DBCFT is number ten GI, number 10.]

RC AKA Darryl, Ron -> RC AKA Darryl, Ron... , March 22, 2017 at 06:16 AM
[Here is more about the concerns over thing number 10 that you should know about DBCFT from the Brookings article above. Bottom line is that the stuff that makes DBCFT desirable for the wage class majority are exactly those things that have been hyped up in selling the bill to the electorate only to be later discarded as non-conforming to WTO rules. This is a classic bait and switch aimed at boosting corporate profits. It may nonetheless shrink the trade deficit over time, but working class people will not see any of it. The gains will go to the owners of the robots that were financed by the DBCFT.

The article linked below and highlighted by excerpts comes from a conservative source, which somewhat surprisingly saw fit to be honest about its consequences including the eventual job killing changes required to enact the DBCFT into law.]

https://www.forbes.com/sites/danielmitchell/2017/01/03/concerns-about-theborder-adjustable-tax-plan-from-the-house-gop-part-i/#456ee19b38df

Concerns About The 'Border Adjustable' Tax Plan From The House GOP, Part I


...Concern #2: Is the DBCFT compliant with WTO obligations?

The United States is part of the World Trade Organization (WTO) and we have ratified various agreements designed to liberalize world trade. This is great for the global economy, but it might not be good news for the Better Way plan because WTO rules only allow border adjustability for indirect taxes like a credit-invoice value-added tax. The DBCFT, by contrast, is a version of a corporate income tax, which is a direct tax.

The column by Charles Lane explains one of the specific problems.

"Trading partners could also challenge the GOP plan as a discriminatory subsidy at the World Trade Organization. That's because it includes a deduction for wages paid by U.S.-located firms, importers and exporters alike - a break that would obviously not be available to competitors abroad.

Advocates argue that the DBCFT is a consumption-base tax, like a VAT. And since credit-invoice VATs are border adjustable, they assert their plan also should get the same treatment. But the WTO rules say that only "indirect" taxes are eligible for border adjustability. The New York Times reports that the WTO therefore would almost surely reject the plan.

"Michael Graetz, a tax expert at the Columbia Law School, said he doubted that argument would prevail in Geneva. "W.T.O. lawyers do not take the view that things that look the same economically are acceptable," Mr. Graetz said.

A story in the Wall Street Journal considers the potential for an adverse ruling from the World Trade Organization.

" Even though it's economically similar to, and probably better than, the value-added taxes (VATs) many other countries use, it may be illegal under World Trade Organization rules. An international clash over taxes is something the world can ill afford when protectionist sentiment is already running high. ...The controversy is over whether border adjustability discriminates against trade partners. ...the WTO operates not according to economics but trade treaties, which generally treat tax exemptions on exports as illegal unless they are consumption taxes, such as the VAT. ...the U.S. has lost similar disputes before. In 1971 it introduced a tax break for exporters that, despite several revamps, the WTO ruled illegal in 2002.

And a Washington Post editorial is similarly concerned.

" Republicans are going to have to figure out how to make such a huge de facto shift in the U.S. tax treatment of imports compliant with international trade law. In its current iteration, the proposal would allow corporations to deduct the costs of wages paid within this country - a nice reward for hiring Americans and paying them well, which for complex reasons could be construed as a discriminatory subsidy under existing World Trade Organization doctrine.


Concern #3: Is the DBCFT a stepping stone to a VAT?

If the plan is adopted, it will be challenged. And if it is challenged, it presumably will be rejected by the WTO. At that point, we would be in uncharted territory.

Would that force the folks in Washington to entirely rewrite the tax system? Would they be more surgical and just repeal border adjustability? Would they ignore the WTO, which would give other nations the right to impose tariffs on American exports?

One worrisome option is that they might simply turn the DBCFT into a subtraction-method value-added tax (VAT) by tweaking the law so that employers no longer could deduct expenses for labor compensation. This change would be seen as more likely to get approval from the WTO since credit-invoice VATs are border adjustable...


[Since this criticism is written by a conservative then some of his concerns regarding the DBCFT that you can read at the link provided above make the DBCFT more attractive to liberal elites. My concerns are more for the wage class majority though.]


JF -> RC AKA Darryl, Ron... , March 22, 2017 at 07:46 AM
Let us make sure we see the forest and not get trapped in the trees looking at their roots.

The goal is to shift the design of the public's revenue system to one where the public finance contributions are shifted away from income and profits and wealth and on to the act of consumption where all of us live.

Are societies, and its economic aspect, about living and consuming? Should we burden this more and more so those with already lightly felt burdens can control even more (of economics and control of society)?

Amazing to think that this is the 21st Century.

RC AKA Darryl, Ron -> JF... , March 22, 2017 at 08:20 AM
"The goal is to shift the design of the public's revenue system to one where the public finance contributions are shifted away from income and profits and wealth and on to the act of consumption where all of us live..."

[That would be your goal buddy, not mine. My goal is to reduce the concentration of wealth and power that subordinates democracy to corporate profits while simultaneously making work and its commensurate rewards available to the broad wage class majority. Corporatists think that they are just collecting the spoils of war, but they forget who actually fights the wars.]

RC AKA Darryl, Ron -> JF... , March 22, 2017 at 08:25 AM
After a second read of your reply I believe that you are actually agreeing with me that the DBCFT is a regressive sales tax. Clearly that is what Republicans want. Everyone's take here at EV was that it is a regressive sales tax. So then we took a second look at it to see if it will create more jobs than it costs and it will not.

[Mar 23, 2017] The Credit Theory of Money

Mar 23, 2017 | economistsview.typepad.com
tjfxh :

Reply Tuesday, March 21, 2017 at 04:15 PM , March 21, 2017 at 04:15 PM
David Graeber, Debt: The First 5000 Years. Melville House; Updated Expanded edition (2014).

Michael Hudson and Marc Van De Mieroop, Debt and Economic Renewal in the Ancient Near East. Capital Decisions Ltd (2002).

Geoffrey Ingham, The Nature of Money. Polity (2004).

A. Mitchell Innes, "The Credit Theory of Money," The Banking Law Journal, Vol. 31 (1914), Dec./Jan., 151-168.

_____________, "What is Money?," The Banking Law Journal, Vol. 30 (1913), May. 377-409

L. Randall Wray, Theories of Money and Banking. Edward Elgar (2012)

______________, Understanding Modern Money:The Key to Full Employment and Price Stability. Edward Elgar (1998)

anne -> tjfxh ... , March 21, 2017 at 04:34 PM
https://www.community-exchange.org/docs/The%20Credit%20Theoriy%20of%20Money.htm

1914

The Credit Theory of Money
By A. Mitchell Innes

https://www.community-exchange.org/docs/what%20is%20money.htm

1913

What Is Money?
By A. MITCHELL INNES

[ I do appreciate these references. ]

[Mar 23, 2017] Cambell law: The more any quantitative social indicator is used for social decision-making, the more subject it will be to corruption pressures and the more apt it will be to

Mar 23, 2017 | economistsview.typepad.com
reason : , March 22, 2017 at 07:25 AM
The most valuable part of Chris Dillow's piece is the link to Campbell's law.

https://en.wikipedia.org/wiki/Campbell%27s_law

I have often referenced this without being aware of it.

My version is that any proxy measure will become less relevant over time as it drifts away from the intended target (the more so if it is used to guide policy).

anne -> reason ... , March 22, 2017 at 07:36 AM
https://en.wikipedia.org/wiki/Campbell%27s_law

Campbell's law is an adage developed by Donald T. Campbell, an example of the cobra effect:

"The more any quantitative social indicator is used for social decision-making, the more subject it will be to corruption pressures and the more apt it will be to distort and corrupt the social processes it is intended to monitor."

Campbell's law was published in 1976 by Campbell, a social psychologist, an experimental social science researcher and the author of many works on research methodology: "When a measure becomes a target, it ceases to be a good measure."

JF -> anne... , March 22, 2017 at 07:50 AM
Chris G probably liked this too. I had Campbell's stuff next to my bed for a long long time.
anne -> JF... , March 22, 2017 at 08:18 AM
I had Donald Campbell's stuff next to my bed for a long long time.

[ Do suggest a reading for us. ]

JF -> anne... , March 22, 2017 at 10:31 AM
"Experimental and Quasi-Experimental Designs for Research" - copyright 1963, my version was the tenth printing in 1973
anne -> JF... , March 22, 2017 at 08:23 AM
http://www.nytimes.com/1996/05/12/us/donald-t-campbell-master-of-many-disciplines-dies-at-79.html

Donald T. Campbell, Master of Many Disciplines
By ROBERT MCG. THOMAS JR.

Donald T. Campbell, a nimble-minded social scientist who left his mark on half a dozen disciplines and helped revolutionize the fundamental principles of scientific inquiry common to them all, died on Monday in a hospital near his home in Bethlehem, Pa....

Dr. Campbell, who did his major work at Northwestern University, was by training and his Berkeley doctorate a social psychologist, but it was a tribute to his bewildering range as a master methodologist that when he took up his last academic post, at Lehigh University, in 1982 university officials threw up their hands and simply designated him "university professor," with faculty listings in the departments of psychology, sociology and anthropology and the department of education.

They could easily have thrown in biology, the philosophy of science and market research. For a generation, virtually no respectable researcher this side of the chemistry lab has designed or carried out a reputable scientific study without a thorough grounding in what Dr. Campbell called quasi-experimentation, the highly sophisticated statistics-based approach he invented to replicate the effects of the truly randomized scientific studies that are all but impossible in the slippery and unruly world of human interactions....

JF -> anne... , March 22, 2017 at 10:34 AM
Should have added influence in political science and public administration to itemize the influence this should have on public policy making.
im1dc -> reason ... , March 22, 2017 at 08:59 AM
It is a valid and reliable adage from a Social Psychologist who Economists should take seriously. His adage explains why Economists are so often wrong, i.e., they fail to take into account the nature and thus behavior of people as individuals, groups, and as both sentient and thinking beings who can and do change behavior routinely sometimes for rational reasons but just as often just to do and be different.

That's impossible to predict with statistical models although with statistical models scientists can capture WHEN a change is occurring, even where and sometimes why and how but only after the change has occurred, which makes Prediction most difficult.

libezkova -> im1dc... , March 22, 2017 at 02:08 PM
Add to this what Marxists used to call "class interest" of financial oligarchy and we get closer to understanding why neo-classical economics is so bad.

[Mar 23, 2017] Nick Rowe recently has shown that Paul Samuelson's classic 1980 takedown ("A Corrected Version of Hume's Equilibrating Mechanisms for International Trade") of David

Notable quotes:
"... Of course, I should admit that I am not an entirely disinterested observer of this engagement, because in the early 1970s, long before I discovered the Samuelson article that Nick is challenging, Earl Thompson had convinced me that Hume's account of PSFM was all wrong, the international arbitrage of tradable-goods prices implying that gold movements between countries couldn't cause the relative price levels of those countries in terms of gold to deviate from a common level, beyond the limits imposed by the operation of international commodity arbitrage. ..."
Mar 23, 2017 | economistsview.typepad.com
Peter K. -> Peter K.... Reply Thursday, March 23, 2017 at 05:48 AM , March 23, 2017 at 05:48 AM
Is this related?

at uneasymoney blog

Samuelson Rules the Seas
by David Glasner
Published March 14, 2017

I think Nick Rowe is a great economist; I really do. And on top of that, he recently has shown himself to be a very brave economist, fearlessly claiming to have shown that Paul Samuelson's classic 1980 takedown ("A Corrected Version of Hume's Equilibrating Mechanisms for International Trade") of David Hume's classic 1752 articulation of the price-specie-flow mechanism (PSFM) ("Of the Balance of Trade") was all wrong. Although I am a great admirer of Paul Samuelson, I am far from believing that he was error-free. But I would be very cautious about attributing an error in pure economic theory to Samuelson. So if you were placing bets, Nick would certainly be the longshot in this match-up.

Of course, I should admit that I am not an entirely disinterested observer of this engagement, because in the early 1970s, long before I discovered the Samuelson article that Nick is challenging, Earl Thompson had convinced me that Hume's account of PSFM was all wrong, the international arbitrage of tradable-goods prices implying that gold movements between countries couldn't cause the relative price levels of those countries in terms of gold to deviate from a common level, beyond the limits imposed by the operation of international commodity arbitrage.

And Thompson's reasoning was largely restated in the ensuing decade by Jacob Frenkel and Harry Johnson ("The Monetary Approach to the Balance of Payments: Essential Concepts and Historical Origins") and by Donald McCloskey and Richard Zecher ("How the Gold Standard Really Worked") both in the 1976 volume on The Monetary Approach to the Balance of Payments edited by Johnson and Frenkel, and by David Laidler in his essay "Adam Smith as a Monetary Economist," explaining why in The Wealth of Nations Smith ignored his best friend Hume's classic essay on PSFM.

So the main point of Samuelson's takedown of Hume and the PSFM was not even original. What was original about Samuelson's classic article was his dismissal of the rationalization that PSFM applies when there are both non-tradable and tradable goods, so that national price levels can deviate from the common international price level in terms of tradables, showing that the inclusion of tradables into the analysis serves only to slow down the adjustment process after a gold-supply shock.

So let's follow Nick in his daring quest to disprove Samuelson, and see where that leads us.

...

painer -> Peter K.... , March 23, 2017 at 06:56 AM
Should be inclusion of non tradeables

I love the just slows down adjustment bit

Reminds me of the predator / prey eco balance fables at the zoo

painer -> painer... , March 23, 2017 at 07:00 AM
History human or "Natural" is all about how fast how soon how often incident and consequence over what time span. Sublime complexity
paine -> painer... , March 23, 2017 at 07:05 AM
Face the market system with awe and .. audacity

[Mar 23, 2017] The Neoclassical Theory of the Firm Does Not Consider Political Engagement

Notable quotes:
"... Q: The neoclassical theory of the firm does not consider political engagement by corporations. How big of an omission do you think this is? ..."
Mar 23, 2017 | economistsview.typepad.com
interview with John C. Coffee at ProMarket :
Q: The neoclassical theory of the firm does not consider political engagement by corporations. How big of an omission do you think this is?
The problems in expanding the theory of the firm to consider political engagements are considerable. Of course, political engagement by firms can be viewed as merely rent-seeking. Unavoidably, this produces waste... (and possibly also corrupt[s] the political system).
But before one jumps to the conclusion that therefore corporations should be denied the right to influence political decisions in the interests of efficiency, more must be considered. For example, this week, over one hundred public corporations, most of them high-tech firms, filed a brief opposing the legality of the executive order signed by President Trump barring various immigrants. 1) This can be viewed as collective action by firms in defense of capitalism and the free flow of goods and services. Those opposed to firms lobbying regulatory agencies would probably approve this defense by corporations of human rights. Nor was this case unique. Corporations, like Apple, Facebook, and Google, have regularly defended human rights.
What this implies is that any absolute, prophylactic rule against political engagement may be undesirable. How then should we distinguish between "good" and "bad" political engagements by corporations? One approach might be to refine the rules of corporate governance and give shareholders greater rights in the process. To the extent that shareholders are diversified, they should rationally oppose rent-seeking by competing firms, as such activity just raises the costs for both sides.
Conversely, however, in concentrated industries where collusion is more likely than competition, diversified shareholders might rationally support rent-seeking (and even reduced competition) by the firms in which they invest. Some empirical evidence suggests that investors in the highly concentrated airline industry have behaved this way. Hence, stronger corporate governance may supply a partial answer sometimes, but hardly always. At best, it can add transparency to the process, thereby making rent-seeking less feasible.
Theorists of the firm who wish to restrict political engagements by firms face a serious problem that they have not yet recognized: at least in the United States, corporate political engagement may be protected by the First Amendment. This means that reforms such as disclosure are possible (and, I think, desirable), but stricter, prophylactic rules are probably not. ...

Posted by Mark Thoma on Wednesday, March 15, 2017 at 11:50 AM in Economics , Market Failure , Regulation | Permalink Comments (5)

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Comments Feed You can follow this conversation by subscribing to the comment feed for this post. reason : , March 16, 2017 at 03:28 AM

It seems to me that the problem is this direct political intervention by corporations. They should be allowed to make donations to charities specifically set up to support civil liberties, human rights etc. (e.g. Amnesty, ACLU) and to allow those organizations to list their support. It is not clear that they should be allowed to act politically in their own right.
mulp -> reason ... , March 16, 2017 at 08:59 AM
So, medical provider corporations should not be allowed to oppose the repeal of Obamacare because they want to keep getting paid by patients getting needed medical care at their clinics and hospitals by doctors and nurses?

Should the AMA be allowed to oppose repeal because it's doctor members want to continue to get paid?

Should nurses unions be allowed to oppose repeal because they want to continue getting paid?

Perhaps you seek a return of slavery to cut living costs by forcing doctors and nurses, farmers, cooks, to work for nothing to benefit consumers?

Or do you believe government can charge nothing while paying those delivering government services good middle class incomes that defined the American Dream in the 60s?

In the 60s, everyone understood good incomes required high prices and taxes. Conservatives sold everyone, including 99% of economists on the free lunch of high incomes and low prices and taxes. TANSTAAFL. Since Reagan, 90% are either no better off or worse off from low prices and taxes.

And that applies to businesses. 90% of businesses are worse off or just holding their own as a result of the political economics of low prices and low taxes.

The modern small business startup is the guy who signs up with Uber and Lyft and then struggles to find ways to be paid by customers without paying the rent seekers more than he might get in business profit.

But again, small businesses have been brainwashed into supporting the policies that hurt them but benefit just 10% of businesses, mostly rentier businesses.

The problem I see is with the education of the people, including people in business, that free lunches are possible. That cutting prices, and taxes are prices, will increase incomes, whether workers or businesses.

Eliminating business lobbying while individuals continue seeking free lunch government will not make anyone better off. TANSTAAFL

reason -> mulp... , March 16, 2017 at 09:22 AM
There are plenty of individuals involved (and employee organizations as well). Companies do not need to be involved. The key point here should always be non-profit and public purpose.
mulp : , March 16, 2017 at 09:10 AM
"Conversely, however, in concentrated industries where collusion is more likely than competition, diversified shareholders might rationally support rent-seeking (and even reduced competition) by the firms in which they invest. Some empirical evidence suggests that investors in the highly concentrated airline industry have behaved this way."

The airline industry has lost money since deregulation, and that is after hundreds of billions in government bailouts and confiscation of shareholder "value".

Yes, there are a number of rent seekers who have profited, but those are the M&A rent seekers, bankruptcy rent seekers, the restructuring rent seekers, ...

While the aircraft industry has consolidated to be dominated by only two, neither Boeing nor Airbus reap economic profit, and their business profits are not stellar, and that is due to strong government support keeping them from insolvency.

csissoko : , March 16, 2017 at 11:05 AM
"corporate political engagement may be protected by the First Amendment"

Corporations are created by state law (with just a few federal exceptions), so surely at the state level it would be possible to alter incorporation statutes so that corporations clearly do not have a right to political engagement.

What am I missing here?

[Mar 23, 2017] What Does Crowding Out Even Mean?

Mar 23, 2017 | economistsview.typepad.com
Peter K. : , March 22, 2017 at 09:29 AM
Lengthy blog post from JW Mason. (See PGL on Furman and the center-left mainstream elucidation of the natural laws of economics and growth theory.)

http://jwmason.org/slackwire/what-does-crowding-out-even-mean/

What Does Crowding Out Even Mean?
by JW Mason

January 16, 2017

Paul Krugman is taking some guff for this column where he argues that the US economy is now at potential, or full employment, so any shift in the federal budget toward deficit will just crowd out private demand.

Whether higher federal spending (or lower taxes) could, in present conditions, lead to higher output is obviously a factual question, on which people may read the evidence in different ways. As it happens, I don't agree that current output is close to the limits of current productive capacity. But that's not what I want to write about right now. Instead I want to ask: What concretely would crowding out even mean right now?

Below, I run through six possible meanings of crowding out, and then ask if any of them gives us a reason, even in principle, to worry about over-expansionary policy today. (Another possibility, suggested by Jared Bernstein, is that while we don't need to worry about supply constraints for the economy as a whole, tax cuts could crowd out useful spending due to some unspecified financial constraint on the federal government. I don't address that here.) Needless to say, doubts about the economic case for crowding-out are in no way an argument for the specific deficit-boosting policies favored by the new administration.

The most straightforward crowding-out story starts from a fixed supply of private savings. These savings can either be lent to the government, or to business. The more the former takes, the less is left for the latter. But as Keynes pointed out long ago, this simple loanable-funds story assumes what it sets out to prove. The total quantity of saving is fixed only if total income is fixed. If higher government spending can in fact raise total income, it will raise total saving as well. We can only tell a story about government and business competing for a given pool of saving if we have already decided for some other reason that GDP can't change.

The more sophisticated version, embodied in the textbook ISLM model, postulates a fixed supply of money, rather than saving. [1] In Hicks' formulation, money is used both for transactions and as the maximally liquid store of wealth. The higher is output, the more money is needed for transactions, and the less is available to be held as wealth. By the familiar logic of supply and demand, this means that wealthholders must be paid more to part with their remaining stock of money. The price wealthholders receive to give up their money is interest; so as GDP rises, so does the interest rate.

Unlike the loanable funds story with fixed saving, this second story does give a logically coherent account of crowding out. In a world of commodity money, if such ever was, it might even be literally true. But in a world of bank-created credit money, it's at best a metaphor. Is it a useful metaphor? That would require two things. First, that the interest rate (whichever one we are interested in) is set by the financial system. And second, that the process by which this happens causes rates to systematically rise with demand. The first premise is immediately rejected by the textbooks, which tell us that "the central bank sets the interest rate." But we needn't take this at face value. There are many interest rates, not just one, and the spreads between them vary quite a bit; logically it is possible that strong demand could lead to wider spreads, as banks stretch must their liquidity further to make more loans. But in reality, the opposite seems more likely. Government debt is a source of liquidity for private banks, not a use of it; lending more to the government makes it easier, not harder, for them to also lend more to private borrowers. Also, a booming economy is one in which business borrowers are more profitable; marginal borrowers look safer and are likely to get better terms. And rising inflation, obviously, reduces the real value of outstanding debt; however annoying this is to bankers, rationally it makes them more willing to lend more to their now less-indebted clients. Wicksell, the semi-acknowledged father of modern central banking theory, built his big book around the premise that in a credit-money system, inflation would give private banks no reason to raise interest rates.

And in fact this is what we see. Interest rate spreads are narrow in booms; they widen in crises and remain wide in downturns.

So crowding out mark two, the ISLM version, requires us to accept both that central banks cannot control the economically relevant interest rates, and that private banks systematically raise interest rates when times are good. Again, in a strict gold standard world there might something to this - banks have to raise rates, their gold reserves are running low - but if we ever lived in that world it was 150 or 200 years ago or more.

A more natural interpretation of the claim that the economy is at potential, is that any further increase in demand would just lead to inflation. This is the version of crowding out in better textbooks, and also the version used by MMT folks. On a certain level, it's obviously correct. Suppose the amount of money-spending in an economy increases. Then either the quantity of goods and services increases, or their prices do. There is no third option: The total percent increase in money spending, must equal the sum of the percent increase in "real" output and the percent increase in average prices. But how does the balance between higher output and higher prices play out in real life? One possibility is that potential output is a hard line: each dollar of spending up to there increases real output one for one, and leaves prices unchanged; each dollar of spending above there increases prices one for one and leaves output unchanged. Alternatively, we might imagine a smooth curve where as spending increases, a higher fraction of each marginal dollar translates into higher prices rather than higher output. [2] This is certainly more realistic, but it invites the question of which point exactly on this curve we call "potential". And it awakens the great bane of postwar macro – an inflation-output tradeoff, where the respective costs and benefits must be assessed politically.

Crowding out mark three, the inflation version, is definitely right in some sense - you can't produce more concrete use values without limit simply by increasing the quantity of money borrowed by the government (or some other entity). But we have to ask first, positively, when we will see this inflation, and second, normatively, how we value lower inflation vs higher output and income.

In the post-1980s orthodoxy, we as society are never supposed to face these questions. They are settled for us by the central bank. This is the fourth, and probably most politically salient, version of crowding out: higher government spending will cause the central bank to raise interest rates. This is the practical content of the textbook story, and in fact newer textbooks replace the LM curve - where the interest rate is in some sense endogenous - with a straight line at whatever interest rate is chosen by the central bank. In the more sophisticated textbooks, this becomes a central bank reaction function - the central bank's actions change from being policy choices, to a fundamental law of the economic universe. The master parable for this story is the 1990s, when the Clinton administration came in with big plans for stimulus, only to be slapped down by Alan Greenspan, who warned that any increase in public spending would be offset by a contractionary shift by the federal reserve. But once Clinton made the walk to Canossa and embraced deficit reduction, Greenspan's fed rewarded him with low rates, substituting private investment in equal measure for the foregone public spending. In the current contest, this means: Any increase in federal borrowing will be offset one for one by a fall in private investment - because the Fed will raise rates enough to make it happen.

This story is crowding out mark four. It depends, first, on what the central bank reaction function actually is - how confident are we that monetary policy will respond in a direct, predictable way to changes in the federal budget balance or to shifts in demand? (The more attention we pay to how the monetary sausage gets made, the less confident we are likely to be.) And second, on whether the central bank really has the power to reliably offset shifts in fiscal policy. In the textbooks this is taken for granted but there are reasons for doubt. It's also not clear why the actions of the central bank should be described as crowding out by fiscal policy. The central bank's policy rule is not a law of nature. Unless there is some other reason to think expansionary policy can't work, it's not much of an argument to say the Fed won't allow it. We end up with something like: "Why can't we have deficit-financed nice things?" "Because the economy is at potential – any more public spending will just crowd out private spending." "How will it be crowded out exactly?" "Interest rates will rise." "Why will they rise?" "Because the federal reserve will tighten." "Why will they tighten?" "Because the economy is at potential."

Suppose we take the central bank out of the picture. Suppose we allow supply constraints to bind on their own, instead of being anticipated by the central planners at the Fed. What would happen as demand pushed up against the limits of productive capacity? One answer, again, is rising inflation. But we shouldn't expect prices to all rise in lockstep. Supply constraints don't mean that production growth halts at once; rather, bottlenecks develop in specific areas. So we should expect inflation to begin with rising prices for inputs in inelastic supply - land, oil, above all labor. Textbook models typically include a Phillips curve, with low unemployment leading to rising wages, which in turn are passed on to higher prices.

But why should they be passed on completely? It's easy to imagine reasons why prices don't respond fully or immediately to changes in wages. In which case, as I've discussed before, rising wages will result in an increase in the wage share. Some people will object that such effects can only be temporary. I'm not sure this makes sense - why shouldn't labor, like anything else, be relatively more expensive in a world where it is relatively more scarce? But even if you think that over the long-term the wage share is entirely set on the supply side, the transition from one "fundamental" wage share to another still has to involve a period of wages rising faster or slower than productivity growth - which in a Phillips curve world, means a period above or below full employment.

We don't hear as much about the labor share as the fundamental supply constraint, compared with savings, inflation or interest rates. But it comes right out of the logic of standard models. To get to crowding out mark five, though, we have to take one more step. We have to also postulate that demand in the economy is profit-led - that a distributional shift from profits toward wages reduces desired investment by more than it increases desired consumption. Whether (or which) real economies display wage-led or profit-led demand is a subject of vigorous debate in heterodox macro. But there's no need to adjudicate that now. Right now I'm just interested in what crowding out could possibly mean.

Demand can affect distribution only if wage increases are not fully passed on to prices. One reason this might happen is that in an open economy, businesses lack pricing power; if they try to pass on increased costs, they'll lose market share to imports. Follow that logic to its endpoint and there are no supply constraints - any increase in spending that can't be satisfied by domestic production is met by imports instead. For an ideal small, open economy potential output is no more relevant than the grocery store's inventory is for an individual household when we go shopping. Instead, like the household, the small open economy faces a budget constraint or a financing constraint - how much it can buy depends on how much it can pay for.

Needless to say, we needn't go to that extreme to imagine a binding external constraint. It's quite reasonable to suppose that, thanks to dependence on imported inputs and/or demand for imported consumption goods, output can't rise without higher imports. And a country may well run out of foreign exchange before it runs out of domestic savings, finance or productive capacity. This is the idea behind multiple gap models in development economics, or balance of payments constrained growth. It also seems like the direction orthodoxy is heading in the eurozone, where competitiveness is bidding to replace inflation as the overriding concern of macro policy.

Crowding out mark six says that any increase in demand from the government sector will absorb scarce foreign exchange that will no longer be available to private sector. How relevant it is depends on how inelastic import demand is, the extent to which the country as a whole faces a binding budget or credit constraint and, what concrete form that constraint faces - what actually happens if international creditors are stiffed, or worry they might be? But the general logic is that higher spending will lead to a higher trade deficit, which at some point can no longer be financed.

So now we have six forms of crowding out:

1. Government competes with business for fixed saving.

2. Government competes with business for scarce liquidity.

3. Increased spending would lead to higher inflation.

4. Increased spending would cause the central bank to raise interest rates.

5. Overfull employment would lead to overfast wage increases.

6. Increased spending would lead to a higher trade deficit.

The next question is: Is there any reason, even in principle, to worry about any of these outcomes in the US today? We can decisively set aside the first, which is logically incoherent, and confidently set aside the second, which doesn't fit a credit-money economy in which government liabilities are the most liquid asset. But the other four certainly could, in principle, reflect real limits on expansionary policy. The question is: In the US in 2017, are higher inflation, higher interest rates, higher wages or a weaker balance of payments position problems we need to worry about? Are they even problems at all?

First, higher inflation. This is the most natural place to look for the costs of demand pushing up against capacity limits. In some situations you'd want to ask how much inflation, exactly, would come from erring on the side of overexpansion, and how costly that higher inflation would be against the benefits of lower unemployment. But we don't have to ask that question right now, because inflation is by conventional measures, too low; so higher inflation isn't a cost of expansionary policy, but an additional benefit. The problem is even worse for Krugman, who has been calling for years now for a higher inflation target, usually 4 percent. You can't support higher inflation without supporting the concrete action needed to bring it about, namely, a period of aggregate spending in excess of potential. [2] Now you might say that changing the inflation target is the responsibility of the Fed, not the fiscal authorities. But even leaving aside the question of democratic accountability, it's hard to take this response seriously when we've spent the last eight years watching the Fed miss its existing target; setting a new higher target isn't going to make a difference unless something else happens to raise demand. I just don't see how you can write "What do we want? Four percent! When do we want it? Now!" and then turn around and object to expansionary fiscal policy on the grounds that it might be inflationary.

OK, but what if the Fed does raise rates in response to any increase in the federal budget deficit, as many observers expect? Again, if you think that more expansionary policy is otherwise desirable, it would seem that your problem here is with the Fed. But set that aside, and assume our choice is between a baseline 2018-2020, and an alternative with the same GDP but with higher budget deficits and higher interest rates. (This is the worst case for crowding out.) Which do we prefer? In the old days, the low-deficit, low-interest world would have been the only respectable choice: Private investment is obviously preferable to whatever government deficits might finance. (And to be fair, in the actual 2018-2020, they will mostly be financing high-end tax cuts.) But as Brad DeLong points out, the calculation is different today. Higher interest rates are now a blessing, not a curse, because they create more running room for the Fed to respond to a downturn. [3] In the second scenario, there will be some help from conventional monetary policy in the next recession, for whatever it's worth; in the first scenario there will be no help at all. And one thing we've surely learned since 2008 is the costs of cyclical downturns are much larger than previously believed. So here again, what is traditionally considered a costs of pushing past supply constraints turns out on closer examination to be a benefit.

...

[Mar 23, 2017] What is Economism and why it is so damaging

Notable quotes:
"... When competitive free markets and rational well-informed actors are the baseline assumption, the burden of proof shifts unfairly onto anyone proposing a government policy. ..."
"... For example, the basic Econ 101 theory of supply and demand is fine for some products, but it doesn't work very well for labor markets. It is incapable of simultaneously explaining both the small effect of minimum wage increases and the small impact of low-skilled immigration. Some more complicated, advanced theory is called for. ..."
"... But no matter how much evidence piles up, people keep talking about "the labor supply curve" and "the labor demand curve" as if these are real objects, and to analyze policies -- for example, overtime rules -- using the same old framework. ..."
"... An idea that we believe in despite all evidence to the contrary isn't a scientific theory -- it's an infectious meme. ..."
"... Academic economists are unsure about how to respond to the abuse of simplistic econ theories for political ends. On one hand, it gives them enormous prestige. The popularity of simplistic econ ideas has made economists the toast of America's intellectual classes. ..."
"... It has sustained enormous demand for the undergraduate econ major, which serves, in the words of writer Michael Lewis, as a "standardized test of general intelligence" for future businesspeople. But as Kwak points out, the simple theories promulgated by politicians and on the Wall Street Journal editorial page often bear little resemblance to the sophisticated theories used by real economists. ..."
"... And when things go wrong -- when the financial system crashes, or millions of workers displaced by Chinese imports fail to find new careers -- it's academic economists who often get blamed, not the blasé and misleading popularizers. ..."
Jan 20, 2017 | economistsview.typepad.com

Peter K. : January 20, 2017 at 04:35 AM

Noah Smith: The Ways That Pop Economics Hurt America - Noah Smith

"So I wonder if economism was really as unrealistic and useless as Kwak seems to imply. Did countries that resisted economism -- Japan, for example, or France [Germany?] -- do better for their poor and middle classes than the U.S.? Wages have stagnated in those countries, and inequality has increased, even as those countries remain poorer than the U.S. Did the U.S.'s problems really all come from economism, or did forces such as globalization and technological change play a part? Cross-country comparisons suggest that the deregulation and tax cuts of the 1980s and 1990s, although ultimately excessive, probably increased economic output somewhat."

Ugh what an awful display of pop economism. Globalization and technology are "impersonal forces." No mention of the rise of inequality or the SecStags. No mention of monetary policy fail in Europe. The biggest lies of economism are the lies of omission.

libezkova -> Peter K.... , -1
Thank you !

Looks like this concept of "Economism" introduced by James Kwak in his book Economism is very important conceptual tool for understanding the tremendous effectiveness of neoliberal propaganda.

I think it is proper to view Economism as a flavor of Lysenkoism. As such it is not very effective in acquiring the dominant position and suppressing of dissent, but it also can be very damaging.

https://www.bloomberg.com/view/articles/2017-01-19/the-ways-that-pop-economics-hurt-america

== quote ==

...When competitive free markets and rational well-informed actors are the baseline assumption, the burden of proof shifts unfairly onto anyone proposing a government policy. For far too many years, free-marketers have gotten away with winning debates by just sitting back and saying "Oh yeah? Show me the market failure!" That deck-stacking has long forced public intellectuals on the left have to work twice as hard as those safely ensconced in think tanks on the free-market right, and given the latter a louder voice in public life than their ideas warrant.

It's also true that simple theories, especially those we learn in our formative years, can maintain an almost unshakeable grip on our thinking.

For example, the basic Econ 101 theory of supply and demand is fine for some products, but it doesn't work very well for labor markets. It is incapable of simultaneously explaining both the small effect of minimum wage increases and the small impact of low-skilled immigration. Some more complicated, advanced theory is called for.

But no matter how much evidence piles up, people keep talking about "the labor supply curve" and "the labor demand curve" as if these are real objects, and to analyze policies -- for example, overtime rules -- using the same old framework.

An idea that we believe in despite all evidence to the contrary isn't a scientific theory -- it's an infectious meme.

Academic economists are unsure about how to respond to the abuse of simplistic econ theories for political ends. On one hand, it gives them enormous prestige. The popularity of simplistic econ ideas has made economists the toast of America's intellectual classes.

It has sustained enormous demand for the undergraduate econ major, which serves, in the words of writer Michael Lewis, as a "standardized test of general intelligence" for future businesspeople. But as Kwak points out, the simple theories promulgated by politicians and on the Wall Street Journal editorial page often bear little resemblance to the sophisticated theories used by real economists.

And when things go wrong -- when the financial system crashes, or millions of workers displaced by Chinese imports fail to find new careers -- it's academic economists who often get blamed, not the blasé and misleading popularizers.

... ... ...

Russia and China have given up communism not because they stopped having working classes, but because it became obvious that their communist systems were keeping them in poverty. And Americans are now starting to question economism because of declining median income, spiraling inequality and a huge financial and economic crisis.

[Mar 23, 2017] Usually the problem is misuse of statistical methods, for example by data dredging or other data-dependent activities, rather than say misinterpreting the results of a significance

Mar 23, 2017 | economistsview.typepad.com
John Williams : Reply Wednesday, March 22, 2017 at 08:14 AM , March 22, 2017 at 08:14 AM
Empirical studies reporting false reports are an unfortunate fact of life. I'm surprised that Noah Smith did not cite John Ioannnidis's paper on biomedical studies: "Why most published research findings are false." journals.plos.org/plosmedicine/article?id=10.1371/journal.pmed.0020124

The reasons have to do with poor statistics and human nature. Andrew Gelman also has a lot to say on this topic. For example, on the famous Deaton/Case result on the mortality rate of middle aged white males: http://andrewgelman.com/2015/11/10/death-rates-have-been-increasing-for-middle-aged-white-women-decreasing-for-men/

reason -> John Williams... , March 22, 2017 at 08:22 AM
Mostly (not always) the statistics are not wrong, it is the interpretation that is the problem.
John Williams -> reason ... , March 22, 2017 at 09:08 AM
Usually the problem is misuse of statistical methods, for example by data dredging or other data-dependent activities, rather than say misinterpreting the results of a significance test.

[Mar 23, 2017] http://michael-hudson.com/2017/01/the-land-belongs-to-god/

Mar 23, 2017 | michael-hudson.com
Reply Tuesday, March 21, 2017 at 02:32 PM

[Mar 23, 2017] Inequality is a real threat to any remnants of democracy in the USA

Mar 23, 2017 | economistsview.typepad.com
anne : March 22, 2017 at 10:27 AM , 2017 at 10:27 AM
https://www.nytimes.com/2017/03/20/books/review/crisis-of-the-middle-class-constitution-ganesh-sitaraman-.html

March 20, 2017

It's Not Just Unfair: Inequality Is a Threat to Our Governance
By ANGUS DEATON

THE CRISIS OF THE MIDDLE-CLASS CONSTITUTION
Why Economic Inequality Threatens Our Republic
By Ganesh Sitaraman

President Obama labeled income inequality "the defining challenge of our time." But why exactly? And why "our time" especially? In part because we now know just how much goes to the very top of the income distribution, and beyond that, we know that recent economic growth, which has been anemic in any case, has accrued mostly to those who were already well-heeled, leaving stagnation or worse for many Americans. But why is this a problem?

Why am I hurt if Mark Zuckerberg develops Facebook, and gets rich on the proceeds? Some care about the unfairness of income inequality itself, some care about the loss of upward mobility and declining opportunities for our kids and some care about how people get rich - hard work and innovation are O.K., but theft, legal or otherwise, is not. Yet there is one threat of inequality that is widely feared, and that has been debated for thousands of years, which is that inequality can undermine governance. In his fine book, both history and call to arms, Ganesh Sitaraman argues that the contemporary explosion of inequality will destroy the American Constitution, which is and was premised on the existence of a large and thriving middle class. He has done us all a great service, taking an issue of overwhelming public importance, delving into its history, helping understand how our forebears handled it and building a platform to think about it today.

As recognized since ancient times, the coexistence of very rich and very poor leads to two possibilities, neither a happy one. The rich can rule alone, disenfranchising or even enslaving the poor, or the poor can rise up and confiscate the wealth of the rich. The rich tend to see themselves as better than the poor, a proclivity that is enhanced and even socially sanctioned in modern meritocracies. The poor, with little prospect of economic improvement and no access to political power, "might turn to a demagogue who would overthrow the government - only to become a tyrant. Oligarchy or tyranny, economic inequality meant the end of the republic."

Some constitutions were written to contain inequalities. In Rome, the patricians ruled, but could be overruled by plebeian tribunes whose role was to protect the poor. There are constitutions with lords and commoners in separate chambers, each with well-defined powers. Sitaraman calls these "class warfare constitutions," and argues that the founding fathers of the United States found another way, a republic of equals. The middle classes, who according to David Hume were obsessed neither with pleasure-seeking, as were the rich, nor with meeting basic necessities, as were the poor, and were thus amenable to reason, could be a firm basis for a republic run in the public interest. There is some sketchy evidence that income and wealth inequality was indeed low in the 18th century, but the crucial point is that early America was an agrarian society of cultivators with an open frontier. No one needed to be poor when land was available in the West.

The founders worried a good deal about people getting too rich. Jefferson was proud of his achievement in abolishing the entail and primogeniture in Virginia, writing the laws that "laid the ax to the root of Pseudoaristocracy." He called for progressive taxation and, like the other founders, feared that the inheritance of wealth would lead to the establishment of an aristocracy. (Contrast this with those today who simultaneously advocate both equality of opportunity and the abolition of estate taxes.) Madison tried to calculate how long the frontier would last, and understood the threat to the Constitution that industrialization would bring; many of the founders thought of wage labor as little better than slavery and hoped that America could remain an agrarian society.

Of course, the fears about industrialization were realized, and by the late 19th century, in the Gilded Age, income inequality had reached levels comparable to those we see today. In perhaps the most original part of his book, Sitaraman, an associate professor of law at Vanderbilt Law School, highlights the achievements of the Progressive movement, one of whose aims was taming inequality, and which successfully modified the Constitution. There were four constitutional amendments in seven years - the direct election of senators, the franchise for women, the prohibition of alcohol and the income tax. To which I would add another reform, the establishment of the Federal Reserve, which provided a mechanism for handling financial crises without the need for the government to be bailed out by rich bankers, as well as the reduction in the tariff, which favored ordinary people by bringing down the cost of manufactures. Politics can respond to inequality, and the Constitution is not set in stone.

What of today, when inequality is back in full force? I am not persuaded that we can be saved by the return of a rational and public-spirited middle class, even if I knew exactly how to identify middle-class people, or to measure how well they are doing. Nor is it clear, postelection, whether the threat is an incipient oligarchy or an incipient populist autocracy; our new president tweets from one to the other. And European countries, without America's middle-class Constitution, face some of the same threats, though more from autocracy than from plutocracy, which their constitutions may have helped them resist. Yet it is clear that we in the United States face the looming threat of a takeover of government by those who would use it to enrich themselves together with a continuing disenfranchisement of large segments of the population....


Angus Deaton, a professor emeritus at Princeton, was awarded the Nobel in economic science in 2015.

libezkova -> anne... , March 22, 2017 at 04:58 PM
Thank you Anne.

As for ".. it is clear that we in the United States face the looming threat of a takeover of government by those who would use it to enrich themselves together with a continuing disenfranchisement of large segments of the population...."

that was accomplished in 1980 by Reagan. That's why we now can speak about "a colony nation" within the USA which encompasses the majority of population.

libezkova -> libezkova... , March 22, 2017 at 04:59 PM
Neoliberals vs the rest of population is like slave owners and the plantation workers.

[Mar 23, 2017] Economist's View Inequality and the Lake Wobegon Effect

Mar 23, 2017 | economistsview.typepad.com
Inequality and the Lake Wobegon Effect From an interview of F. M. Scherer (Professor Emeritus in the John F. Kennedy School of Government at Harvard, and former chief economist at the Federal Trade Commission) at ProMarket:
"Our Efforts to Deal With Tech Firms' Market Dominance in the U.S. Have Been an Abject Failure" : ...Q: The five largest internet and tech companies-Apple, Google, Amazon, Facebook, and Microsoft-have outstanding market share in their markets. Are current antitrust policies and theories able to deal with the potential problems that arise from the dominant positions of these companies and the vast data they collect on users?
Our efforts to deal with the problems in the United States have been an abject failure. ...I might note that Facebook's dominant position in the market is due in part to its role as an innovator and partly to "network externalities"... Microsoft's dominant position is also attributable in part to network externalities...
But the antitrust agencies have not taken sufficient measures to remedy abuses of this advantage.
Q: Is there a connection between the growing inequality in the U.S. and concentration, dominant firms, and winner-take-all markets?
I believe there is. The evidence of rising wealth inequality, especially through the work of Piketty and co-authors, is compelling. Less well known is evidence compiled at M.I.T. of strongly rising inequality of compensation, especially at the top executive levels. The nexus has not to my knowledge been fully articulated.
Here's my hypothesis: In recent decades, most publicly-traded corporations, at least in the United States, have embraced executive compensation consultants to advise the board of directors on executive compensation levels. Those consultants provide data on compensation averages and distributions for companies in peer industries. But then the Lake Wobegon effect goes to work. The boards say, "Surely, our guy isn't below average," to the average reported by the compensation consultants becomes the minimum standard for compensation. If each top executive receives at least the minimum reported pay and often more, the average rises steadily.
Indeed, and here I tread on weaker ground, those compensation costs are built into the costs considered by companies in their product pricing decisions (in a kind of rent-seeking model), and so price levels rise to accommodate rising compensation. I might note that this dynamic applies not only for chief executives, but trickles down to embrace most of companies' management personnel. ...

Posted by Mark Thoma on Wednesday, March 22, 2017 at 10:50 AM Permalink Comments (23)

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Comments Feed You can follow this conversation by subscribing to the comment feed for this post. JohnH : , March 22, 2017 at 11:04 AM

As I said a couple days ago, "Good to see economists finally addressing issues that John Kenneth Galbraith raised 50 years ago...but were largely ignored since then by 'librul' economists who didn't want to cross the folks who had funded their academic chairs."

For the past 40 years, corporate strategic planning has been all about market dominance. Back in the late 1970s Harvard Business School professor Michael Porter was all the rage along with the Boston Consulting Group, Mitt Romney's Bain Capital, and GE's Jack Welch. the mantra was that if you couldn't dominate a market, best get out. Weaker players were tolerated mostly to allay anti-trust intrusion.

Meanwhile, Republicans tacitly supported it, Democrats turned a blind eye, and 'librul' economists were off doing whatever they do.

pgl -> JohnH... , March 22, 2017 at 12:26 PM
F. M. Scherer has been at this before you were even born.5

""Good to see economists finally addressing issues" is such an incredibly stupid and pointless rant.

Peter K. -> pgl... , March 22, 2017 at 01:15 PM
Stupid troll from PGL as usual.
pgl : , March 22, 2017 at 12:28 PM
The text on Industrial Organization when I was an undergrad was by Scherer. Of course Jean Tirole has also became a leading star in this area. If Scherer thinks anti-trust has fallen short - everyone involved should take notic.
Peter K. -> pgl... , March 22, 2017 at 01:18 PM
Yes your candidate Hillary was so good on anti-trust. I'm sure she would have been much better than Obama or her husband.

*sarcasm*

Scherer: " The evidence of rising wealth inequality, especially through the work of Piketty and co-authors, is compelling."

Piketty is backing Hamon, the Bernie Sanders in the French election. If PGL was French he'd be attacking Piketty as a Hamon Bro.

yuan -> Peter K.... , March 22, 2017 at 01:41 PM
When it came to anti-trust Clinton's policy positions were stronger than Sanders who largely limited his discussion to banks.

http://www.motherjones.com/kevin-drum/2016/10/heres-hillary-clinton-antitrust-and-entrepreneurism

I personally would love to see Amazon, Apple, Google, Comcast, and Microsoft etc broken up into little pieces.

Rune Lagman -> yuan... , March 22, 2017 at 05:16 PM
The problem with Hillary Clinton is that no one believed her.
She was (is) seen as representing the current "corporate-friendly" establishment.
yuan -> Rune Lagman... , March 23, 2017 at 09:18 AM
this is why i wrote "policy positions".

i don't think either sanders or clinton are particularly strong when it comes to trust busting. warren is somewhat better but is still overly focused on a narrow slice of anti-competitive corporate culture, imo.

yuan -> Peter K.... , March 22, 2017 at 01:46 PM
Your love affair with Hamon is strange given that Mélenchon has stronger positions on income inequality and corporate capture. He is also beating Hamon in the polls.

http://www.bfmtv.com/politique/comparez-les-programmes-de-hamon-et-melenchon-1094351.html

Maximilian : , March 22, 2017 at 12:44 PM
Evidence in support of Sherer's hypothesis can be found in Tom DiPrete et al's 2010 article in AJS: Compensation Benchmarking, Leapfrogs, and the Surge in Executive Pay. They write: "Scholars frequently argue whether the sharp rise in chief executive officer (CEO) pay in recent years is "efficient" or is a consequence of "rent extraction" because of the failure of corporate governance in individual firms. This article argues that governance failure must be conceptualized at the market rather than the firm level because excessive pay increases for even relatively few CEOs a year spread to other firms through the cognitively and rhetorically constructed compensation networks of "peer groups," which are used in the benchmarking process to negotiate the compensation of CEOs. Counterfactual simulation based on Standard and Poor's ExecuComp data demonstrates that the effects of CEO "leapfrogging" potentially explain a considerable fraction of the overall upward movement of executive compensation since the early 1990s."
https://academiccommons.columbia.edu/catalog/ac%3A139538
point : , March 22, 2017 at 01:08 PM
The story told is nearly exactly the one Warren Buffett has been telling since 95, maybe earlier, so I do not know who was prior.
Sanjait : , March 22, 2017 at 01:20 PM
To say those companies owe their fortunes in part to network externalities is ... an understatement.

With the scalability and mass customizability of web and software, these industries are almost perfectly structured for natural monopolies. For many tech entrepreneurs, the race isnt to see who can profit from superior innovation but rather who can be first with innovative enough solutions to dominate market spaces and limit opportunities for true competitors to emerge.

Do we think Amazon continues to operate at a zero net profit margin because they are nice? No. They do so because they want to be the dominant internet retailer of everything.

The question is what could and should be done about this ... and that is a tough one. The problem with markets with huge network effects is that they naturally gravitate to monopolies. How to break them without reducing rather than enhancing customer value, and how to do it in a rapidly evolving tech world? Yeesh.

JohnH -> Sanjait... , March 22, 2017 at 03:25 PM
Actually many web entrepreneurs understood the game in the 1990s much better than sanjait: "For many tech entrepreneurs, the race isn't to see who can profit from superior innovation but rather who can be first with innovative enough solutions to SELL THEIR vaporware to those dominating market spaces and limit opportunities for true competition to emerge."

In the 1990s much of the tech boom was focused on selling to monopolists, because becoming a monopolist was already recognized to be futile for most market entrants.

No surprise that politicians remained oblivious...as did economists.

cm -> JohnH... , March 23, 2017 at 09:22 AM
I would distinguish between "type 1" and "type 2" vaporware - type 1 being products that cannot and will not be delivered as announced, where the announcement is only to "fool" customers into not using competitors, and type 2 being products that just take much longer and come much later than initially announced - where it is often not clear whether the announcement was too optimistic or deliberately oversold in a type 1 kind of way.

I would not say that the big successful companies founded their success on (type 1) vaporware. E.g. MS profited from very strong network effects (Office formats and document compatibility forcing frequent Windows/Office upgrades in the user base), likewise other vendors whose proprietary file formats were established as the quasi standard for document exchange and product delivery (e.g. Adobe PDF, Flash as a more general consumer visible example). Then e.g. SAP and Oracle with strong tie-in between business software, data bases, business data integration across organizations, and workforce skills to implement, operate, and use the software.

The common theme is massive user-side investment in the data format/protocol infrastructure ("ecosystem"). It is not much different from power and water lines, where several different "competing" infrastructures are simply not economically or even physically viable.

mulp : , March 22, 2017 at 02:50 PM
"Apple, Google, Amazon, Facebook, and Microsoft-have outstanding market share in their markets."

Only by defining markets very very narrowly is that true.

Samsung sells many times the highly equivalent products Apple sells. Many more smart phones and an equal number of phones with texting that Apple does not offer. But Samsung does not have even 50% of the global market. For TVs, Apple is a footnote in the overall TV product market, selling few TVs if any, no cable or OTA DVRs, no DVD/BD players, and far from a dominant share of streaming video.

The only place Apple dominates is when selling stuff with the word Apple and an icon of an apple with a bite out of it, and even then, the Beatles compete selling music products with equivalent logos.

Amazon has less than half the Internet general merchandise market, which is in turn a fraction of the Internet market in everything, and that is a fraction of the total market in stuff just in the US and EU, and the US and EU are less than half the global market.

Ditto for the rest.

The only dominance these companies have is in driving disruptive growth in investment by customers. They have done this by selling at profit margins that are half that of the incumbents.

Google ads sell for much less than ads on Yahoo which sold for less than ads in newspapers and magazines which sold for less per customer than fliers. Fliers still compete with Google because they are better targeted. In dense residential areas people go door to door stuffing fliers in your door, and in suburban and rural areas they go by US mail into your mailbox.

Google sells Geospatial services today at a fraction of the price in 2000 when such services were offered by established providers getting most of their revenue from government, but at a fairly high price. Google invested lots of labor cost and bought high labor cost assets to build and update its own database that it sell access to for fractions of a penny per image, payments coming from businesses paying to be seen by possible customers that are in the area of the business. The difference is in scale, exploiting the extremely high elasticity of demand for images. At $1 per day to see images and maps, maybe there are a million customers. But if using the service with businesses getting to put ten cents of ads in front of your face is the price, demand is probably a hundred million customers, so the much lower price generates ten times the revenue, but with maybe five times the investment.

Google by making high investment on an ongoing basic and selling at lower prices instead of the MBA higher price makes more money for Google if it gets one or two orders of magnitude more customers.

But Google does not do what MBAs advise and hike prices and cut investment once they have over 50% of the market. Nor does Amazon, Apple, et al when they gain over 50% of their narrow market.

And no one has a monopoly in mapping and Geospatial data. While free paper maps are far fewer, you will find paper maps for sale in millions of stores. And at government tourist centers, you will find free maps with lots of ads targeted at people shopping for the things visitors are shopping for. Ie, Google does not control the market for free maps with ads on them.

anne -> mulp... , March 22, 2017 at 03:00 PM
Interesting criticism. Do develop this argument further when possible.
cm -> anne... , March 23, 2017 at 09:31 AM
Economy of scale by automation at large scale. The 'G' company has acquired a pretty strong reputation for "bad" or "nonexistent" in-person customer service, and rather losing customers than funding the cost of retaining them and addressing their issues/complaints with in-person support. Perhaps this works only in a growing market. But the underlying reason is undoubtedly that their success and relatively low cost is only possible with almost full automation. As soon as humans have to come into the picture, the cost will go up significantly due to scaling issues.

Conversely, you will see upon closer inspection that these companies are mostly spectacularly successful, and limit their endeavors, in areas where almost full automation at large scale is possible, while still being able to generate revenue that supports the marginal costs.

JohnH -> mulp... , March 22, 2017 at 03:33 PM
This is the monopolists' argument...redefine their market in such a way as to show that there is still lots of competition: an oligopoly of soft drink companies could claim that there is still plenty of competition if you include water. Google can claim that there is still competition from encyclopedias at libraries! AT&T and Verizon, who dominate cellular transmission, can cite all sorts of other ways for people to communicate with each other...heck, you can still write letters or shout across the street!
Longtooth -> mulp... , March 22, 2017 at 04:49 PM
At its core, what we refer to as a monopoly is some offering (it can be any offering but generally we think only of commercial offerings) that has by any means available within the limits of law obtained a market position that it then uses to drive out most existing competitors and keep out new ones, therefore either maintaining or increasing its monopoly.

Achieving a monopoly status (as long as it's done by staying within the limits of law) isn't the issue. The issue is whether after having done so, the monopoly should be sustained by law.

There are indeed many ways to define monopoly or lack thereof as Mulp points out & JohnH elaborates (below). The opposing arguments of Muop & JohnH are both just points of view, but the law on the subject is what counts... not individual points of view.

Unfortunately the law isn't explicit in defining a monopoly.. what constitutes monopoly, the level of market share, or whether it's used to drive out existing competition or prevent new competition.

The law we have was based on a determination of whether an offering is "in restraint of trade"... that is limiting competition such that it enabled the monopoly to extract "rents" which it would otherwise be unable to do if competition were sufficient.

There's a problem however in-as-much-as a monopoly may be established purely by massive investments of capital.. capital which no other group is willing to put to the same endeavor to compete.

Competitive capital to compete will necessarily have to return a worthwhile roi, and thus until the monopoly is extracting sufficiently large enough "rents" the competitive use of capital may most often or never be sufficiently high enough to obtain the requisite roi required, and thus will not be applied to compete with the monopoly.

BUT, when "rent" extraction becomes sufficiently high enough to make competitive capital available to compete for part of that rent.. hence reducing it, it always does so, and the monopoly disappears in due course.

Its only when the monopoly can restrict any competing capital from competing for part of those rents that the law on monopolies becomes relevant, and thus how to define what constitutes a monopoly.

Extracting "rents" from monopoly power is in fact the only reason monopolies exist (incentive to monopolize) and it's the only reason we have patent laws that the State provides to give monopoly power that enables it to extract "rents"... though the rents can only be extracted legitimately for 17 or 19 years (I forget what the most recent time limit on patents is). Patent law is another subject.

The law is vague... using the Microsoft Anti-trust case as just one example, the trail court found Microsoft guilty, but the appeals court overturned the trial court. The Department of Justice and Microsoft reached a settlement and none of the States appealed the appeals court's decision or it's agreement of settlement between the DOJ and Microsoft.

If mulp and JohnH want to argue the monopoly topic that's fine, but it is of zero value to settling anything or finding agreement on the issues. Both of them are arguing what constitutes a monopoly when in fact that's irrelevant. Monopolies aren't illegal by any definition of law or history of law. The issue is whether having such monopoly is used to restrain competition for being pursued.... it has to be an active restraint... not just because competitors want to compete at lower capital investment than is required to complete.

anne : , March 22, 2017 at 04:04 PM
https://www.nytimes.com/2017/03/20/books/review/crisis-of-the-middle-class-constitution-ganesh-sitaraman-.html

March 20, 2017

It's Not Just Unfair: Inequality Is a Threat to Our Governance
By ANGUS DEATON

THE CRISIS OF THE MIDDLE-CLASS CONSTITUTION
Why Economic Inequality Threatens Our Republic
By Ganesh Sitaraman

President Obama labeled income inequality "the defining challenge of our time." But why exactly? And why "our time" especially? In part because we now know just how much goes to the very top of the income distribution, and beyond that, we know that recent economic growth, which has been anemic in any case, has accrued mostly to those who were already well-heeled, leaving stagnation or worse for many Americans. But why is this a problem?

Why am I hurt if Mark Zuckerberg develops Facebook, and gets rich on the proceeds? Some care about the unfairness of income inequality itself, some care about the loss of upward mobility and declining opportunities for our kids and some care about how people get rich - hard work and innovation are O.K., but theft, legal or otherwise, is not. Yet there is one threat of inequality that is widely feared, and that has been debated for thousands of years, which is that inequality can undermine governance. In his fine book, both history and call to arms, Ganesh Sitaraman argues that the contemporary explosion of inequality will destroy the American Constitution, which is and was premised on the existence of a large and thriving middle class. He has done us all a great service, taking an issue of overwhelming public importance, delving into its history, helping understand how our forebears handled it and building a platform to think about it today.

As recognized since ancient times, the coexistence of very rich and very poor leads to two possibilities, neither a happy one. The rich can rule alone, disenfranchising or even enslaving the poor, or the poor can rise up and confiscate the wealth of the rich. The rich tend to see themselves as better than the poor, a proclivity that is enhanced and even socially sanctioned in modern meritocracies. The poor, with little prospect of economic improvement and no access to political power, "might turn to a demagogue who would overthrow the government - only to become a tyrant. Oligarchy or tyranny, economic inequality meant the end of the republic."

Some constitutions were written to contain inequalities. In Rome, the patricians ruled, but could be overruled by plebeian tribunes whose role was to protect the poor. There are constitutions with lords and commoners in separate chambers, each with well-defined powers. Sitaraman calls these "class warfare constitutions," and argues that the founding fathers of the United States found another way, a republic of equals. The middle classes, who according to David Hume were obsessed neither with pleasure-seeking, as were the rich, nor with meeting basic necessities, as were the poor, and were thus amenable to reason, could be a firm basis for a republic run in the public interest. There is some sketchy evidence that income and wealth inequality was indeed low in the 18th century, but the crucial point is that early America was an agrarian society of cultivators with an open frontier. No one needed to be poor when land was available in the West.

The founders worried a good deal about people getting too rich. Jefferson was proud of his achievement in abolishing the entail and primogeniture in Virginia, writing the laws that "laid the ax to the root of Pseudoaristocracy." He called for progressive taxation and, like the other founders, feared that the inheritance of wealth would lead to the establishment of an aristocracy. (Contrast this with those today who simultaneously advocate both equality of opportunity and the abolition of estate taxes.) Madison tried to calculate how long the frontier would last, and understood the threat to the Constitution that industrialization would bring; many of the founders thought of wage labor as little better than slavery and hoped that America could remain an agrarian society.

Of course, the fears about industrialization were realized, and by the late 19th century, in the Gilded Age, income inequality had reached levels comparable to those we see today. In perhaps the most original part of his book, Sitaraman, an associate professor of law at Vanderbilt Law School, highlights the achievements of the Progressive movement, one of whose aims was taming inequality, and which successfully modified the Constitution. There were four constitutional amendments in seven years - the direct election of senators, the franchise for women, the prohibition of alcohol and the income tax. To which I would add another reform, the establishment of the Federal Reserve, which provided a mechanism for handling financial crises without the need for the government to be bailed out by rich bankers, as well as the reduction in the tariff, which favored ordinary people by bringing down the cost of manufactures. Politics can respond to inequality, and the Constitution is not set in stone.

What of today, when inequality is back in full force? I am not persuaded that we can be saved by the return of a rational and public-spirited middle class, even if I knew exactly how to identify middle-class people, or to measure how well they are doing. Nor is it clear, postelection, whether the threat is an incipient oligarchy or an incipient populist autocracy; our new president tweets from one to the other. And European countries, without America's middle-class Constitution, face some of the same threats, though more from autocracy than from plutocracy, which their constitutions may have helped them resist. Yet it is clear that we in the United States face the looming threat of a takeover of government by those who would use it to enrich themselves together with a continuing disenfranchisement of large segments of the population....


Angus Deaton, a professor emeritus at Princeton, was awarded the Nobel in economic science in 2015.

reason : , March 23, 2017 at 12:56 AM
Network advantage - it is increasingly the dominant paradigm. I think we need to combat vertical integration here - separate the ownership of the standard from the implementation of the standard. It will take a major rethink but it is the secret of the success of the internet itself.

I keep saying the benefit of computers is hiding in plain sight. Computers make administration scalable, in a way that it never was before - the cost savings are in avoiding cost increases as complexity increases with size. That is why they are so hard to measure. The measure if you like is increasing market concentration.

reason -> reason ... , March 23, 2017 at 01:01 AM
And in rising executive compensation, as executives running bigger firms capture the oligoopoly rents.
cm -> reason ... , March 23, 2017 at 09:43 AM
Then you would have to require that e.g. software products have to conform to a public standard, and only the standard.

A lot of products with network effects have proprietary features that are not in the/a standard, but which provide a considerable "value add".

Are you proposing that companies should be forced to "open source" all the details of their products related to data formats and interoperation, and at what time during the lifecycle from conception, development, rollout, incremental change, etc.?

Many such "features" cannot even be documented independently from the concrete implementation (as they are developed now). It would also need a change in the specification and development process, that a publicizable spec is produced first, and then the product only implements exactly what is in the spec.

[Mar 23, 2017] I'm beginning to hate the word free . There is no free trade - only negotiated and regulated trade.

Mar 23, 2017 | economistsview.typepad.com
reason : Reply Thursday, March 23, 2017 at 02:20 AM , March 23, 2017 at 02:20 AM
Is the question
"Are there Benefits from Free Trade" - different from the question "Are there Benefits from Trade"? What work is word "free" doing here - and what does it even mean?

I'm beginning to hate the word "free". It is so vague and so often misused that I'm beginning to think it should just be banned. It is a hindrance to communication.

Tom aka Rusty said in reply to reason ... , March 23, 2017 at 04:45 AM
There is no "free" trade - only negotiated and regulated trade.

And we seem to do a really lousy job of negotiating, unless you are in the small percentage who rigged the game.

Peter K. -> Tom aka Rusty... , March 23, 2017 at 05:38 AM
You sound like Trump. Watch out, that will earn you PGL's ire.

You also kind of sound like Sanders.

reason -> Tom aka Rusty... , March 23, 2017 at 06:31 AM
Who are "we"? Most people in the rest of the world thinks the game was rigged by the U.S. (whose main interest seems to be in protecting its patent holders and agriculture).
Tom aka Rusty said in reply to reason ... , March 23, 2017 at 06:34 AM
I care more about US workers than workers in other countries.

As should our politicians.

And I think when the US is strong the rest of the world is better for it.

Smart $$$$ Long said in reply to Tom aka Rusty... , March 23, 2017 at 06:53 AM
Do you know where your citizens are?

As more expatriots travel and do business overseas, more foreign born sisters, brothers, and cousins come here for our slice of the global supply chain production. As the line blurs between our home girls and home boys vs others, the lines between many ethnicities also blurs as intermarriage moves forward.

Forget political favoritism and affirmative favoritism! Let the good times roll and thrill your soul! Got soul?

Get
it
!

Tom aka Rusty said in reply to Smart $$$$ Long... , March 23, 2017 at 08:27 AM
I don;t care where they come from, once they are legal US workers they are my home boys and girls.
DrDick -> Tom aka Rusty... , -1
Silly boy, only large corporations and capital matter. Workers are a hindrance to rent extractions and can be sacrificed.

[Mar 23, 2017] Complacency Or Community Commitment? Human And Social Capital Reconsidered

Mar 23, 2017 | economistsview.typepad.com
anne -> RC AKA Darryl, Ron... Reply Wednesday, March 22, 2017 at 02:34 PM , March 22, 2017 at 02:34 PM
Also excellent:

http://econospeak.blogspot.com/2017/03/complacency-or-community-commitment.html

March 22, 2017

Complacency Or Community Commitment? Human And Social Capital Reconsidered

I have been poking at Tyler Cowen's recent book on The Complacent Class, along with those who have praised it unstintingly, with my main complaint being that what he calls complacency may really be fear. In an exchange * posted today between Tyler and Noah Smith at Bloomberg, Noah makes many of my points, saying that what people who are not moving or changing jobs are doing is seeking "safety and security," with "complacency" sounding like "blithe optimism." Tyler then admits that "many people are afraid," but then says that they are still complacent because they are not reacting "with urgency." He also says that a lack of increased income volatility shows that they do not have reason to feel they are facing more risks than those in the past did, although it looks to me like the greater risks they face are more due to higher payments they must make for health or education rather than greater volatility of income. But this is not what I want mostly to address here, at least further....

* https://www.bloomberg.com/view/articles/2017-03-22/tyler-cowen-and-noah-smith-debate-american-complacency

-- Barkley Rosser

[Mar 23, 2017] New research identifies a 'sea of despair' among white, working-class Americans

Mar 23, 2017 | economistsview.typepad.com
anne : Reply Thursday, March 23, 2017 at 04:48 PM , March 23, 2017 at 04:48 PM
https://www.washingtonpost.com/national/health-science/new-research-identifies-a-sea-of-despair-among-white-working-class-americans/2017/03/22/c777ab6e-0da6-11e7-9b0d-d27c98455440_story.html

March 23, 2017

New research identifies a 'sea of despair' among white, working-class Americans
By Joel Achenbach and Dan Keating - Washington Post

Sickness and early death in the white working class could be rooted in poor job prospects for less-educated young people as they first enter the labor market, a situation that compounds over time through family dysfunction, social isolation, addiction, obesity and other pathologies, according to a study published Thursday by two prominent economists.

Anne Case and Angus Deaton garnered national headlines in 2015 when they reported that the death rate of midlife non-Hispanic white Americans had risen steadily since 1999 in contrast with the death rates of blacks, Hispanics and Europeans. Their new study extends the data by two years and shows that whatever is driving the mortality spike is not easing up.

The two Princeton professors say the trend affects whites of both sexes and is happening nearly everywhere in the country. Education level is significant: People with a college degree report better health and happiness than those with only some college, who in turn are doing much better than those who never went.

[Graph]

Offering what they call a tentative but "plausible" explanation, they write that less-educated white Americans who struggle in the job market in early adulthood are likely to experience a "cumulative disadvantage" over time, with health and personal problems that often lead to drug overdoses, alcohol-related liver disease and suicide.

"Ultimately, we see our story as about the collapse of the white, high-school-educated working class after its heyday in the early 1970s, and the pathologies that accompany that decline," they conclude.

The study comes as Congress debates how to dismantle parts of the Affordable Care Act. Case and Deaton report that poor health is becoming more common for each new generation of middle-aged, less-educated white Americans. And they are going downhill faster.

In a teleconference with reporters this week, Case said the new research found a "sea of despair" across America. A striking feature is the rise in physical pain. The pattern does not follow short-term economic cycles but reflects a long-term disintegration of job prospects.

"You used to be able to get a really good job with a high school diploma. A job with on-the-job training, a job with benefits. You could expect to move up," she said.

The nation's obesity epidemic may be another sign of stress and physical pain, she continued: "People may want to soothe the beast. They may do that with alcohol, they may do that with drugs, they may do that with food."

Similarly, Deaton cited suicide as an action that could be triggered not by a single event but by a cumulative series of disappointments: "Your family life has fallen apart, you don't know your kids anymore, all the things you expected when you started out your life just haven't happened at all."

[Graph]

The economists say that there is no obvious solution but that a starting point would be limiting the overuse of opioids, which killed more than 30,000 Americans in 2015.

The two will present their study on Friday at the Brookings Institution.

"Their paper documents some facts. What is the story behind those facts is a matter of speculation," said Adriana Lleras-Muney, a University of California at Los Angeles economics professor, who will also speak at Brookings.

She noted that less-educated white Americans tend to be strikingly pessimistic when interviewed about their prospects.

"It's just a background of continuous decline. You're worse off than your parents," Lleras-Muney said. "Whereas for Hispanics, or immigrants like myself" - she is from Colombia - "or blacks, yes, circumstances are bad, but they've been getting better."

David Cutler, an economics professor at Harvard who also will be discussing the paper at Brookings, said the declining health of white, working-class Americans suggests that Republican plans to replace the Affordable Care Act are akin to bleeding a sick patient. As he put it, "Treat the fever by causing an even bigger fever."

Whites continue to have longer life expectancy than African Americans and lower death rates, but that gap has narrowed since the late 1990s. The picture may have shifted again around the Great Recession, however: Graphs accompanying the new paper suggest that death rates for blacks with only a high school education began rising around 2010 in many age groups, as if following the trend that began about a decade earlier among whites.

White men continue to die at higher rates than white women in every age group. But because women started with lower death rates, the recent mortality increase reflects a greater change in their likelihood of dying early. The numbers reported by Case and Deaton suggest that white men today are about twice as likely as they were in 1999 to die from one of the "diseases of despair," while women are about four times as likely....

anne -> anne... , March 23, 2017 at 04:59 PM
https://fred.stlouisfed.org/graph/?g=d5HR

January 4, 2017

Employment-Population Ratios, * 2000-2017

* Bachelor's Degree and Higher, Some College or Associate Degree, High School Graduates, No College; Employment age 25 and over

anne -> anne... , March 23, 2017 at 05:02 PM
https://fred.stlouisfed.org/graph/?g=d7vK

January 4, 2017

Employment-Population Ratios, * 2000-2017

* Bachelor's Degree and Higher, Some College or Associate Degree; Employment age 25 and over

anne -> anne... , March 23, 2017 at 06:19 PM
http://www.oecd.org/health/health-systems/oecd-health-statistics-2014-frequently-requested-data.htm

November, 2016

Organisation for Economic Co-operation and Development Health Data

Life expectancy at birth, total population, 2014

United States ( 78.8)
OECD average ( 80.6)

Australia ( 82.4)
Austria ( 81.6)
Belgium ( 81.4)
Canada ( 81.5)
Chile ( 79.0)
Czech Republic ( 78.9)
Denmark ( 80.8)
Finland ( 81.3)
France ( 82.8)
Germany ( 81.2)
Greece ( 81.5)
Hungary ( 75.9)
Iceland ( 82.9)
Ireland ( 81.4)
Israel ( 82.2)
Italy ( 83.2)
Japan ( 83.7)
Korea ( 82.2)
Luxembourg ( 82.3)
Mexico ( 74.8)
Netherlands ( 81.8)
New Zealand ( 81.6)
Norway ( 82.2)
Poland ( 77.7)
Portugal ( 81.2)
Slovak Republic ( 76.9)
Spain ( 83.3)
Sweden ( 82.3)
Switzerland ( 83.3)
Turkey ( 78.0)
United Kingdom ( 81.4)

anne -> anne... , March 23, 2017 at 06:19 PM
http://www.oecd.org/health/health-systems/oecd-health-statistics-2014-frequently-requested-data.htm

November, 2016

Organisation for Economic Co-operation and Development Health Data

Life expectancy at 65 years old, males, 2014

United States ( 18.0)
OECD average ( 17.9)

Life expectancy at 65 years old, females, 2014

United States ( 20.5)
OECD average ( 21.4)

Life expectancy at birth, males, 2014

United States ( 76.4)
OECD average ( 77.9)

Life expectancy at birth, females, 2014

United States ( 81.2)
OECD average ( 83.3)

Life expectancy at birth, total population, 2014

United States ( 78.8)
OECD average ( 80.6)

im1dc -> anne... , March 23, 2017 at 06:35 PM
"New research identifies a 'sea of despair' among white, working-class Americans"

Seems appropriate given Republican anti-people Politics today.

libezkova -> anne... , March 23, 2017 at 06:38 PM
"Republican plans to replace the Affordable Care Act are akin to bleeding a sick patient"

This is all about the "colony within the neoliberal state" effect.

There are at least two classes of citizens under neoliberalism. "Have-nots" and "Have-more" as unforgettable Bush Ii quipped.

Why "Masters of the Universe" should care much about neoliberal "plantation slaves", as long as they still reproduce ?

[Mar 23, 2017] Anti-russian hysteria became a witch hunt which is by-and-large out of control of Democratic leadership, and they feel that they became hostages of it

Notable quotes:
"... " The chairman of the House Intelligence Committee, Devin Nunes, R-Calif., does not know "for sure" whether President Donald Trump or members of his transition team were even on the phone calls or other communications now being cited as partial vindication for the president's wiretapping claims against the Obama administration, according to a spokesperson. ..."
"... I think im1dc along with a couple of other commenters here symbolize perfectly well the problem Democratic leadership got on themselves. ..."
"... He got the taste of sniffing Russian pants and now he can't stop, despite the fact that all his knowledge of Russia came from US media. Kind of political graphomania, of some sort. Or, incontinence, if you wish. ..."
"... In other words now in the USA hysteria became detached from the facts and has now its own life. Obtained classic witch hunt dynamics. ..."
"... "The principal problem for Democrats is that so many media figures and online charlatans are personally benefiting from feeding the base increasingly unhinged, fact-free conspiracies - just as right-wing media polemicists did after both Bill Clinton and Obama were elected - that there are now millions of partisan soldiers absolutely convinced of a Trump/Russia conspiracy for which, at least as of now, there is no evidence. ..."
"... And they are all waiting for the day, which they regard as inevitable and imminent, when this theory will be proven and Trump will be removed. ..."
"... Key Democratic officials are clearly worried about the expectations that have been purposely stoked and are now trying to tamp them down. Many of them have tried to signal that the beliefs the base has been led to adopt have no basis in reason or evidence. ..."
Mar 23, 2017 | economistsview.typepad.com
im1dc : Reply Thursday, March 23, 2017 at 04:32 PM
Devin Nunes is unfit to be Intel Chair of the House Committee

http://www.thedailybeast.com/cheats/2017/03/23/nunes-now-unsure-if-trump-team-was-surveilled.html

"Intel chair Devin Nunes unsure if Trump associates were directly surveilled"

By Mike Levine...Mar 23, 2017...5:24 PM ET

" The chairman of the House Intelligence Committee, Devin Nunes, R-Calif., does not know "for sure" whether President Donald Trump or members of his transition team were even on the phone calls or other communications now being cited as partial vindication for the president's wiretapping claims against the Obama administration, according to a spokesperson.

"He said he'll have to get all the documents he requested from the [intelligence community] about this before he knows for sure," a spokesperson for Nunes said Thursday..."

libezkova -> im1dc..., March 23, 2017 at 07:04 PM

I think im1dc along with a couple of other commenters here symbolize perfectly well the problem Democratic leadership got on themselves.

He got the taste of sniffing Russian pants and now he can't stop, despite the fact that all his knowledge of Russia came from US media. Kind of political graphomania, of some sort. Or, incontinence, if you wish.

In other words now in the USA hysteria became detached from the facts and has now its own life. Obtained classic witch hunt dynamics.

It became by-and-large out of control of Democratic leadership, and they feel that they became hostages of it. But they can't call the dogs back.

It was a dirty but effective trick to avoid sacking Democratic Party failed, corrupt neoliberal leadership (Clinton wing of the party). It worked, but it come with a price.

As Glenn Greenwald noted.

"The principal problem for Democrats is that so many media figures and online charlatans are personally benefiting from feeding the base increasingly unhinged, fact-free conspiracies - just as right-wing media polemicists did after both Bill Clinton and Obama were elected - that there are now millions of partisan soldiers absolutely convinced of a Trump/Russia conspiracy for which, at least as of now, there is no evidence.

And they are all waiting for the day, which they regard as inevitable and imminent, when this theory will be proven and Trump will be removed.

Key Democratic officials are clearly worried about the expectations that have been purposely stoked and are now trying to tamp them down. Many of them have tried to signal that the beliefs the base has been led to adopt have no basis in reason or evidence.

The latest official to throw cold water on the MSNBC-led circus is President Obama's former acting CIA chief Michael Morell. What makes him particularly notable in this context is that Morell was one of Clinton's most vocal CIA surrogates. In August, he not only endorsed Clinton in the pages of the New York Times but also became the first high official to explicitly accuse Trump of disloyalty, claiming, "In the intelligence business, we would say that Mr. Putin had recruited Mr. Trump as an unwitting agent of the Russian Federation."

But on Wednesday night, Morell appeared at an intelligence community forum to "cast doubt" on "allegations that members of the Trump campaign colluded with Russia." "On the question of the Trump campaign conspiring with the Russians here, there is smoke, but there is no fire at all," he said, adding, "There's no little campfire, there's no little candle, there's no spark. And there's a lot of people looking for it."

https://theintercept.com/2017/03/16/key-democratic-officials-now-warning-base-not-to-expect-evidence-of-trumprussia-collusion/

[Mar 23, 2017] CNN doubles down on Russia threat hysteria

Mar 23, 2017 | economistsview.typepad.com
Anachronism : March 23, 2017 at 04:41 AM , 2017 at 04:41 AM
The story is starting to get interesting:

http://www.cnn.com/2017/03/22/politics/us-officials-info-suggests-trump-associates-may-have-coordinated-with-russians/index.html

US officials: Info suggests Trump associates may have coordinated with Russians

By Pamela Brown, Evan Perez, Shimon Prokupecz and Jim Sciutto, CNN

US officials: Trump associates may have coordinated with Russians 14:11

Washington (CNN) - The FBI has information that indicates associates of President Donald Trump communicated with suspected Russian operatives to possibly coordinate the release of information damaging to Hillary Clinton's campaign, US officials told CNN.

This is partly what FBI Director James Comey was referring to when he made a bombshell announcement Monday before Congress that the FBI is investigating the Trump campaign's ties to Russia, according to one source.

The FBI is now reviewing that information, which includes human intelligence, travel, business and phone records and accounts of in-person meetings, according to those U.S. officials. The information is raising the suspicions of FBI counterintelligence investigators that the coordination may have taken place, though officials cautioned that the information was not conclusive and that the investigation is ongoing.

In his statement on Monday Comey said the FBI began looking into possible coordination between Trump campaign associates and suspected Russian operatives because the bureau had gathered "a credible allegation of wrongdoing or reasonable basis to believe an American may be acting as an agent of a foreign power."

The White House did not comment and the FBI declined to comment.

White House press secretary Sean Spicer maintained Monday after Comey's testimony that there was no evidence to suggest any collusion took place.

"Investigating it and having proof of it are two different things," Spicer said.

One law enforcement official said the information in hand suggests "people connected to the campaign were in contact and it appeared they were giving the thumbs up to release information when it was ready." But other U.S. officials who spoke to CNN say it's premature to draw that inference from the information gathered so far since it's largely circumstantial.

The FBI cannot yet prove that collusion took place, but the information suggesting collusion is now a large focus of the investigation, the officials said.

The FBI has already been investigating four former Trump campaign associates -- Michael Flynn, Paul Manafort, Roger Stone and Carter Page -- for contacts with Russians known to US intelligence. All four have denied improper contacts and CNN has not confirmed any of them are the subjects of the information the FBI is reviewing.

One of the obstacles the sources say the FBI now faces in finding conclusive intelligence is that communications between Trump's associates and Russians have ceased in recent months given the public focus on Russia's alleged ties to the Trump campaign. Some Russian officials have also changed their methods of communications, making monitoring more difficult, the officials said.

Last July, Russian intelligence agencies began orchestrating the release of hacked emails stolen in a breach of the Democratic National Committee and associated organizations, as well as email accounts belonging to Clinton campaign officials, according to U.S. intelligence agencies.

The Russian operation was also in part focused on the publication of so-called "fake news" stories aimed at undermining Hillary Clinton's campaign. But FBI investigators say they are less focused on the coordination and publication of those "fake news" stories, in part because those publications are generally protected free speech.

The release of the stolen emails, meanwhile, transformed an ordinary cyber-intrusion investigation into a much bigger case handled by the FBI's counterintelligence division.

FBI counterintelligence investigations are notoriously lengthy and often involve some of the U.S. government's most highly classified programs, such as those focused on intelligence-gathering, which can make it difficult for investigators to bring criminal charges without exposing those programs.

Investigators continue to analyze the material and information from multiple sources for any possible indications of coordination, according to US officials. Director Comey in Monday's hearing refused to reveal what specifically the FBI was looking for or who they're focusing on.

US officials said the information was not drawn from the leaked dossier of unverified information compiled by a former British intelligence official compiled for Trump's political opponents, though the dossier also suggested coordination between Trump campaign associates and Russian operatives.

kthomas -> Anachronism ... , March 23, 2017 at 04:51 AM
He's probably bangin' his daughter.
anne -> kthomas... , March 23, 2017 at 05:54 AM
He's probably ------- his --------.

[ This person is continually obscene. This person is continually trying to terrorize and destroy. ]

kthomas -> anne... , March 23, 2017 at 06:40 AM
Piss off. Nobody elected you to blog sheriff, you hypocrite.
Peter K. -> kthomas... , March 23, 2017 at 07:06 AM
troll.
anne -> kthomas... , March 23, 2017 at 07:21 AM
He's probably ------- his --------.

---- off.

Oh look, a new ------- ----------.

[ This person is continually obscene. This person is continually trying to terrorize and destroy. This person continually threatens others.

I am afraid of this person. ]

Gerald -> Anachronism ... , March 23, 2017 at 06:24 AM
"The story is starting to get interesting."

There's little doubt in my mind that Trump's team did in fact collude with the Russians, and that the investigation will ultimately come to the same conclusion. That's when the fun begins, if impeachment proceedings can be called fun. Trump will deny, deny, deny that he had any knowledge of the collusion; the fact that he's a serial liar won't prevent most Republicans from voting against his impeachment. Only Trump can save us by doing a Nixon and resigning. He won't though, and we'll be right back where we are, with one huge exception: we'll have a proven traitor sitting in the White House, kept there by a spineless GOP.

Anachronism -> Gerald... , March 23, 2017 at 06:41 AM
Agreed. If in fact the FBI can prove substantial ties between the Russians and the Trump team co-ordinating the Wikileak email dump, that has to qualify as "high crimes and misdemeanors".

And given that, at this point, President Cheeto is so unpopular, plus the FBI's evidence (yet to be proven), they would almost have to vote for impeachment or risk losing re-election in their home districts.

Go make some popcorn, grab your favorite beverage, sit back and enjoy the sound of them imploding.

Gerald -> Anachronism ... , March 23, 2017 at 07:18 AM
"...and enjoy the sound of them imploding." Can't wait to hear it. :)
JohnH -> Anachronism ... , March 23, 2017 at 07:15 AM
Like Whitewater, this investigation will take years and may well come up empty.

Meanwhile, Democrats can obsess about how unfair the election was, deny any notion that Hillary was a lousy candidate, and refuse to figure out how to talk to working people or come up with any kind of coherent economic message.

Trump-Putin shows that they are willing to do most any distraction to keep from having to keep their eye on the ball!

As a result, Democrats will mostly likely circle the wagons to foist another mealy mouthed neoliberal on the electorate in 2020 in the tradition of Gore, Kerry, and Hillary, a candidate who will almost certainly assure Trump a second term.

Despite a string of congressional losses, the sclerotic, corrupt leadership refuses get rid of their losing leadership. It would appear that Democrats have grown to love playing Washington Generals to Republicans' Harlem Globetrotters.

The current requirement for a duopoly assures that there is always a place for losers.

JohnH -> Anachronism ... , March 23, 2017 at 08:02 AM
Mark my words: "The Trump-Putin investigation [will take] years because [investigators can't] find any wrongdoing from [Trump-Putin] and so then continued looking into [Trump-Putin] whenever they could, simply to keep the witch hunt going."

If they had any evidence beyond innuendo and hearsay, we would have seen some of it by now.

Trump-Putin has become an elaborate distraction to keep Democrats from looking honestly at their failure, and to keep the American public entertained as Trump guts the remnants of their safety net.

[Mar 23, 2017] Disgraceful maliciousness from Voice of America, the official news source of the United States

Mar 23, 2017 | economistsview.typepad.com
anne : March 22, 2017 at 11:14 AM , 2017 at 11:14 AM
http://www.voanews.com/a/xi-china-politics/3775175.html

March 21, 2017

Is Xi Jinping Putin-izing China?
By William Ide and Brian Kopczynski

BEIJING -

[ Disgraceful maliciousness from Voice of America, the official news source of the United States. ]

anne -> anne... , March 22, 2017 at 01:41 PM
http://www.voanews.com/a/xi-china-politics/3775175.html

March 21, 2017

Is Xi Jinping Putin-izing China?
By William Ide and Brian Kopczynski

BEIJING -

One thing that was clear during China's recently concluded high-level political meetings in Beijing is that Xi Jinping is the country's uncontested leader and the most powerful this populous nation has seen in decades.

What is less certain, though, is what he seeks to do with that authority and whether it means he could be seeking a third term in office.

Core strengthening

During the recent meetings of the National People's Congress (NPC) - China's rubber-stamp parliament and the Chinese People's Political Consultative Conference (CPPCC), the phrase of "Xi as core leader of the party" was used repeatedly, coming up before officials discussed a wide range of topics from the economy to the environment.

The title was not given to Xi's predecessor Hu Jintao - but Jiang Zemin also had it - and it puts him on par with former leaders such as Mao Zedong and Deng Xiaoping.

It is a sign that regardless of length of term or retirement age, Xi will be around for a good time going forward, said China leadership analyst Willy Lam.

"So having been designated the core leader, that means he is virtually emperor for life, and that is the message Xi Jinping wants to tell the Chinese people and leaders of other countries, that he will be around to guide the realization of the Chinese Dream," Lam said.

Succession is a drawn out and politically sensitive process in China. Since leadership transitions became more institutionalized in the early 2000s, top leaders have served two five-year terms as president. Later this year, in October or November, a party congress (the 19th) will be held.

That meeting will lead to a major reshuffle of the party's central leadership and is a time, usually, when possible successors become more certain. However, with Xi in charge and "core" of the party, there is more uncertainty than ever about who may be next in line - if anyone.

Succession uncertain

Jean-Pierre Cabestan, a political scientist at Hong Kong Baptist University, said while Guizhou Party Secretary Chen Min'er is one individual who has been mentioned as a possible next in line candidate, some speculate that Xi could wait until closer to the end of his second term in office around 2022 to allow such a person to emerge.

"It remains to be seen whether Xi Jinping is going to promote anyone who will really be clearly identified as a successor," Cabestan said. "The theory is that he wants to wait another five years before designating a successor."

He adds that in the run up to the party congress later this year, a politically sensitive time, the emphasis on Xi as the core is likely to continue and intensify.

The 19th Party Congress will be a time of political reshuffle and members of the party's top decision-making body, the Politburo Standing Committee, will be replaced. The standing committee is made up of anywhere between five and nine members. There is talk of Xi again shrinking it from the current seven down to five.

Out of those members, as many as four may be replaced, analysts said. Almost half of the politburo, a body of 25 members will need to be replaced because of age requirements and the same goes for the party's powerful Central Military Commission.

Putin-izing China

Since rising to office in 2012, Xi has been steadily and aggressively consolidating his power. In addition to serving as president and head of the party and military, he is also the head of a number of other leading groups, including the Central National Security Commission and Leading Group for Financial and Economic Affairs....

anne -> anne... , March 22, 2017 at 04:07 PM
https://en.wikipedia.org/wiki/Voice_of_America

Voice of America (VOA) is a United States government-funded multimedia news source and the official external broadcasting institution of the United States. VOA provides programming for broadcast on radio, television, and the Internet outside of the U.S., in English and some foreign languages. The VOA charter-signed into law in 1976 by President Gerald Ford-requires VOA to "serve as a consistently reliable and authoritative source of news" and "be accurate, objective and comprehensive".

anne -> anne... , March 22, 2017 at 04:08 PM
http://www.voanews.com/a/xi-china-politics/3775175.html

March 21, 2017

Is Xi Jinping Putin-izing China?
By William Ide and Brian Kopczynski

BEIJING -

[ The VOA charter-signed into law in 1976 by President Gerald Ford-requires VOA to "serve as a consistently reliable and authoritative source of news" and "be accurate, objective and comprehensive":

https://en.wikipedia.org/wiki/Voice_of_America ]

[Mar 22, 2017] Medicaid is a popular and relatively efficient insurance program that has provided health care and peace of mind for millions of Americans for more than half a century. Why start taking it apart now? Because that is the genes of neoliberalism. A wolf cant stop hunting. This is a predatory ideology

Notable quotes:
"... Obamacare, President Donald Trump is fond of saying, is a "complete and total disaster" and must be replaced. Yet one of the most significant features of his party's proposed replacement has little to do with Obamacare. ..."
"... True, expanded eligibility for Medicaid is an important part of Obamacare. And the AHCA would reverse this expansion. But its much bigger change is to the Medicaid program as it existed long before Obamacare. Medicaid is a popular and relatively efficient insurance program that has provided health care and peace of mind for millions of Americans for more than half a century. Why start taking it apart now? ..."
"... Whatever the reason, it's a step in the wrong direction. Those who lose Medicaid coverage would still need care, and their fellow Americans would still have to pick up the tab. ..."
"... As things stand now with Medicaid, states pay doctors for providing care to enrollees, and the federal government reimburses the states up to 75 percent of that cost. When a state spends more than usual -- in the event of a hurricane or an opioid epidemic, for example -- the federal share keeps up. ..."
Mar 22, 2017 | economistsview.typepad.com
Anachronism : March 22, 2017 at 10:55 AM
https://www.bloomberg.com/view/articles/2017-03-22/republicans-want-to-repeal-medicaid-too

Republicans Want to Repeal Medicaid, Too

Obamacare, President Donald Trump is fond of saying, is a "complete and total disaster" and must be replaced. Yet one of the most significant features of his party's proposed replacement has little to do with Obamacare.

The American Health Care Act would drastically reshape Medicaid -- ending the federal government's long-running, open-ended commitment to help states pay for care for the poor. Instead, in 2020, Washington would make limited per capita contributions that would shrink as a share of costs with every passing year.

True, expanded eligibility for Medicaid is an important part of Obamacare. And the AHCA would reverse this expansion. But its much bigger change is to the Medicaid program as it existed long before Obamacare. Medicaid is a popular and relatively efficient insurance program that has provided health care and peace of mind for millions of Americans for more than half a century. Why start taking it apart now?

Part of the rationale is that the changes to Medicaid would save $880 billion over 10 years, allowing Congress to make further tax cuts later this year. (Trump telegraphed the strategy in a speech to supporters Monday.) At the same time, many Republicans have long disliked the program's open-ended promise of federal money.

Whatever the reason, it's a step in the wrong direction. Those who lose Medicaid coverage would still need care, and their fellow Americans would still have to pick up the tab.

As things stand now with Medicaid, states pay doctors for providing care to enrollees, and the federal government reimburses the states up to 75 percent of that cost. When a state spends more than usual -- in the event of a hurricane or an opioid epidemic, for example -- the federal share keeps up.

Under the AHCA, each state would instead be given a capped allowance, and that amount would rise each year with medical inflation. It would not account for any unforeseen expenses. Over time, as the rise in per-patient costs outstripped the rise in general medical inflation -- as the Congressional Budget Office assumes they will -- the federal share of funding would decline. Hundreds of billions in costs would be shifted from the federal government to the states. In response, states would need to either raise their own spending on Medicaid -- or more likely, offer fewer services to fewer people.

It is this last possibility that is most disturbing. Medicaid has been required to cover some groups of people -- mothers and children living in poverty, for example -- but not all. One of the consequences of the AHCA would be to discontinue coverage to many who just recently gained coverage under the expansion funded by Obamacare. If a state took the option, now included in the AHCA, to accept a Medicaid block grant rather than a per-capita allotment, it could set its own eligibility standards.

Sending large groups of people back to the private insurance market in a post-Obamacare world, with its increasingly unaffordable premiums and increasingly expensive out-of-pocket costs, would be not only inefficient but also unjust.

libezkova -> Anachronism ... , March 22, 2017 at 05:09 PM
"Medicaid is a popular and relatively efficient insurance program that has provided health care and peace of mind for millions of Americans for more than half a century. Why start taking it apart now?"

Because that is the genes of neoliberalism. A wolf can't stop hunting. This is a predatory ideology. And that creates the seeds of it own demise, despite being pretty resilient after 2008 crash.

[Mar 22, 2017] Washington revolving doors are the main mechanism of corruption of government officials under neoliberalism. So this mechanism represents Clear and present danger to the

Notable quotes:
"... I think Trump's "national neoliberalism" (or as I called it before "bastard neoliberalism") regime is no less corrupt then classic [neoliberalism]. So this mechanism represents "Clear and present danger" to the society. ..."
Mar 22, 2017 | economistsview.typepad.com
anne -> reason ... , March 22, 2017 at 07:48 AM
http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2017/03/incentivizing-politicians.html

March 21, 2017

INCENTIVIZING POLITICIANS

Frankly, I don't see how institutional tweaks could greatly improve things. Banning ministers from taking jobs after leaving office would risk deterring competent and younger people from politics. And making them personally liable for bad policy would raise tricky problems of distinguishing between bad luck and bad judgment, would run into Campbell's law, and would disincentivize radical policies, as ministers would prefer to fail conventionally....

-- Chris Dillow

libezkova -> anne... , March 22, 2017 at 02:05 PM
That's a disingenuous statement from Chris Dillow. Washington revolving doors are the main mechanism of corruption of government officials under neoliberalism.

See for example

http://billmoyers.com/content/stories-from-washingtons-revolving-door/

http://truepublica.org.uk/eu/4300/

I think Trump's "national neoliberalism" (or as I called it before "bastard neoliberalism") regime is no less corrupt then classic [neoliberalism]. So this mechanism represents "Clear and present danger" to the society.

[Mar 22, 2017] Trump has even lost the support of the WSJ, Karma is biting him in his arse

Mar 22, 2017 | economistsview.typepad.com
im1dc : March 22, 2017 at 08:35 AM
Trump has even lost the support of the WSJ, Karma is biting him in his arse . What's comes next a call for his Impeachment from FOX News 'Friends and Family'?

http://www.cnn.com/2017/03/22/politics/donald-trump-wsj-trust/index.html

CNN video 1:08 quoting the WSJ Opinion article today. "WSJ editorial: Most Americans may conclude Trump 'fake president'"

By Eugene Scott, CNN...Wed...March 22, 2017...Updated 10:16 AM ET,

"(CNN)President Donald Trump's repeated lack of "respect for the truth" puts him in jeopardy of being viewed as "a fake President," The Wall Street Journal editorial board says.

"Two months into his presidency, Gallup has Mr. Trump's approval rating at 39%. No doubt Mr. Trump considers that fake news, but if he doesn't show more respect for the truth, most Americans may conclude he's a fake President," reads the editorial, which appeared online Tuesday night."...

libezkova said in reply to im1dc... , March 22, 2017 at 03:48 PM
"Trump has even lost the support of the WSJ"

Was not WSJ a supporter of Hillary ? Am I missing something ?

reason -> im1dc... , March 22, 2017 at 09:05 AM
I think the US Presidency is like the Ruler of the universe in Hitchhiker's guide to the galaxy. Anybody who wants the job is not suitable.
Peter K. -> reason ... , March 22, 2017 at 09:14 AM
Hillary was suitable, but not a very good candidate following on Obama's charm.

Can't believe the center-left ran a candidate who lost to Trump.

Well yes I can. And I can believe they don't want to do a post mortem.

Ambitious careerists like PGL are never good at self-criticism or insights.

libezkova -> Peter K.... , March 22, 2017 at 03:08 PM
"Hillary was suitable"

Suitable for whom?

[Mar 22, 2017] At least 400K people were

Mar 22, 2017 | economistsview.typepad.com
killed directly by the USA's wars in Iraq, Afghanistan, and Pakistan. yuan -> Jerry Brown... Reply Sunday, March 19, 2017 at 08:41 PM , March 19, 2017 at 08:41 PM
367-395,000 people killed directly by the USA's wars in Iraq, Afghanistan, and Pakistan.

~800,000 killed indirectaly by the USA's wars in Iraq, Afghanistan, and Pakistan.

http://watson.brown.edu/costsofwar/figures

~4.8 trillion dollars spent killing people in Iraq, Afghanistan, and Pakistan.

http://watson.brown.edu/costsofwar/figures/2016/us-budgetary-costs-wars-through-2016-479-trillion-and-counting

http://watson.brown.edu/costsofwar/figures/2016/direct-war-death-toll-iraq-afghanistan-and-pakistan-2001-370000

Jerry Brown -> yuan... , March 19, 2017 at 08:58 PM
Yes, George W. Bush will never get a thank you from me.
yuan -> Jerry Brown... , March 20, 2017 at 08:00 AM
The unnecessary killing and spending did not end under Obama.
Jerry Brown -> yuan... , March 20, 2017 at 08:30 AM
I am of the opinion that less killing is an improvement over more killing. There was a lot less killing under Obama.
Jerry Brown -> Jerry Brown... , March 20, 2017 at 08:40 AM
Yuan, why don't you reread the comment I wrote that you decided to respond to and ask yourself where in that comment I said President Obama never made any mistakes or that he was some kind of saint. It was a nice story that Mark Thoma posted. That doesn't mean everything the government does is right or that I believe that the government has not done evil things. I am thankful for the improvements as they occur and continue to try for further improvement.

[Mar 22, 2017] mainly macro Post-truth and propaganda

Notable quotes:
"... Propaganda on the other hand, to borrow from Jacob Stanley, aims to provide information that will deceive people from seeing what is in their best interest. Propaganda provides information that supports a particular political goal or point of view. ..."
"... Take, for example, the issue of welfare benefits. Media as the truth-purveyor type will try and present a rounded and accurate picture of those claiming welfare benefits. Right wing propaganda on the other hand will focus on examples of benefit fraud, or cases where the benefit recipient will be perceived by the reader as taking advantage of the system ..."
"... In both in the UK and US there is a large part of the media which is becoming more and more like a pure propaganda outlet. ..."
"... In the UK and US, we now have propaganda machines that support political ideas that are associated with the far right, and political interests associated with the very wealthy. Their output is governed more and more by whether it assists those two goals. ..."
Mar 22, 2017 | mainlymacro.blogspot.com
Let me define two archetypes. The first, which could be called the truth purveyor, is the one we are familiar with, and which much of the mainstream media (MSM) like to imagine they correspond to. The aim is provide the best information to readers or viewers. The second is propaganda. One way of characterising the two archetypes is as follows. Readers have certain interests: objectives, goals, utilities etc. The truth purveyor will provide readers with the information they need to pursue those interests. (As exemplified here , for example.) Propaganda on the other hand, to borrow from Jacob Stanley, aims to provide information that will deceive people from seeing what is in their best interest. Propaganda provides information that supports a particular political goal or point of view.
Take, for example, the issue of welfare benefits. Media as the truth-purveyor type will try and present a rounded and accurate picture of those claiming welfare benefits. Right wing propaganda on the other hand will focus on examples of benefit fraud, or cases where the benefit recipient will be perceived by the reader as taking advantage of the system , with little or no attempt to put the example in any kind of context. This slanted coverage is designed to give the impression that benefit recipients are often scroungers and skivers. The political goal is to make it easier for governments to cut welfare payments, which in turn may allows taxes to be cut.
These are archetypes, and any media organisation will mix the two to some extent. Many would argue that even the most truth-purveyor type organisation may still embody certain assumptions or points of view that distort their readers view of what should be in their best interest. (As argued in Manufacturing Consent , for example.) Mediamacro is an example of this. But that should not blind us to what is happening elsewhere. Lines like "liberals' nostalgia for factual politics seems designed to mask their own fraught relationship with the truth" [1] suggest nothing new is happening, let's move on. That would be a huge mistake. It is like saying all news is propaganda, who cares. But because there are two archetypes, organisations can gradually move from one to another, and that movement is important. It played a crucial role in the success of Brexit and Trump.
In both in the UK and US there is a large part of the media which is becoming more and more like a pure propaganda outlet. We are used to thinking about propaganda as being associated with the state, but there is no reason why that has to be the case. In the UK and US, we now have propaganda machines that support political ideas that are associated with the far right, and political interests associated with the very wealthy. Their output is governed more and more by whether it assists those two goals.

[Mar 22, 2017] Economist's View How Money Made Us Modern

Mar 22, 2017 | economistsview.typepad.com
How Money Made Us Modern Patrick Kiger at National Geographic:
How Money Made Us Modern : About 9,500 years ago in the Mesopotamian region of Sumer, ancient accountants kept track of farmers' crops and livestock by stacking small pieces of baked clay, almost like the tokens used in board games today. One piece might signify a bushel of grain, while another with a different shape might represent a farm animal or a jar of olive oil.
Those humble little ceramic shapes might not seem have much in common with today's $100 bill, whose high-tech anti-counterfeiting features include a special security thread designed to turn pink when illuminated by ultraviolet light, let alone with credit-card swipes and online transactions that for many Americans are rapidly taking the place of cash.
But the roots of those modern modes of payment may lie in the Sumerians' tokens. ...

Posted by Mark Thoma on Tuesday, March 21, 2017 at 10:06 AM in Economics | Permalink Comments (10)

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Comments Feed You can follow this conversation by subscribing to the comment feed for this post. Shah of Bratpuhr : , March 21, 2017 at 11:08 AM

Article ended with Bitcoin... otherwise, great story.
Shah of Bratpuhr -> Shah of Bratpuhr... , March 21, 2017 at 11:09 AM
Bitcoin is quite volatile vs USD.

https://btcvol.info/

tjfxh : , March 21, 2017 at 12:34 PM
The article is poorly researched. The author needs to read Innes, Graeber, Ingham, Wray and Hudson on the history of money from the perspective of credit instead of relying on Davies, who emphasizes commodity money and doesn't distinguish between bullion and chartal.
kthomas -> tjfxh ... , March 21, 2017 at 01:03 PM
....coffee. Was there nothing you agreed with?
tjfxh : , March 21, 2017 at 02:09 PM
I was speaking specifically of the early history in my comment, but the entire article was rather one-sided. The debated on the history and nature of money is nuanced and the author made it seem as through the article presents a definitive version. The audience to which it is addressed would not glean that from the article and would likely come away with a one-sided and simplistic perspective on the history and nature of money.
anne -> tjfxh ... , March 21, 2017 at 02:32 PM
Do set down any specific references when possible.
JohnH : , March 21, 2017 at 02:32 PM
Michael Hudson offers a wonderful piece on the ancient middle east, how they handled oppressive debt, and how, in the Anglo-Saxon word, the biblical word for debt got translated into 'sin.'

"From the actual people who study cuneiform records, 90% of which are economic, what we have surviving from Sumer and Babylonia, from about 2500 BC to the time of Jesus, are mainly marriage contracts, dowries, legal contracts, economic contracts, and loan contracts. Above all, loans....

The rulers had what we would call an economic model. They realized that every economy tended to become unstable as a result of compound interest. We have the training tablets that they trained scribal students with, around 1800 or 1900 BC. They had to calculate: How long does it take debt to double its size, at what we'd call 20% interest? The answer is 5 years. How does long it take to multiply four-fold? The answer is 10 years. How much to multiply 64 times? The answer is 30 years. Well you can imagine how fast the debts grew.

So they knew how the tendency of every society was that people would run up debts. Now when they ran up debts in Sumer and Babylonia, and even in in Judea in Jesus' time, they didn't borrow money from money lenders. People owed debts because they were in arrears: They couldn't pay the fees owed to the palace. We might call them taxes, but they actually were fees for public services. And for beer, for instance. The palace would supply beer and you would run up a tab over the year, to be paid at harvest time on the threshing floor. You also would pay for the boatmen, if you needed to get your harvest delivered by boat. You would pay for draught cattle if you needed them. You'd pay for water. Cornelia Wunsch did one study and found that 75% of the debts, even in neo-Babylonian times around the 5th or 4th century BC, were arrears.

Sometimes the harvest failed. And when the harvest failed, obviously they couldn't pay their fees and other debts. Hammurabi canceled debts four or five times during his reign. He did this because either the harvest failed or there was a war and people couldn't pay.

What do you do if you're a ruler and people can't pay? One reason they would cancel debts is that most debts were owed to the palace or to the temples, which were under the control of the palace. So you're canceling debts that are owed to yourself.

Rulers had a good reason for doing this. If they didn't cancel the debts, then people who owed money would become bondservants to the tax collector or the wealthy creditors, or whoever they owed money to. If they were bondservants, they couldn't serve in the army. They couldn't provide the corvée labor duties – the kind of tax that people had to pay in the form of labor. Or they would defect. If you wanted to win a war you had to have a citizenry that had its own land, its own means of support."
http://michael-hudson.com/2017/01/the-land-belongs-to-god/

pgl -> JohnH... , March 21, 2017 at 03:26 PM
"The focus of my talk today will be Jesus' first sermon and the long background behind it that helps explain what he was talking about and what he sought to bring about."

Glad you are researching the ancient history of monetary regimes. Especially since your research into monetary history over the past 150 years is so incredibly wrong.

tjfxh : , March 21, 2017 at 04:15 PM
David Graeber, Debt: The First 5000 Years. Melville House; Updated Expanded edition (2014).

Michael Hudson and Marc Van De Mieroop, Debt and Economic Renewal in the Ancient Near East. Capital Decisions Ltd (2002).

Geoffrey Ingham, The Nature of Money. Polity (2004).

A. Mitchell Innes, "The Credit Theory of Money," The Banking Law Journal, Vol. 31 (1914), Dec./Jan., 151-168.

_____________, "What is Money?," The Banking Law Journal, Vol. 30 (1913), May. 377-409

L. Randall Wray, Theories of Money and Banking. Edward Elgar (2012)

______________, Understanding Modern Money:The Key to Full Employment and Price Stability. Edward Elgar (1998)

anne -> tjfxh ... , March 21, 2017 at 04:34 PM
https://www.community-exchange.org/docs/The%20Credit%20Theoriy%20of%20Money.htm

1914

The Credit Theory of Money
By A. Mitchell Innes

https://www.community-exchange.org/docs/what%20is%20money.htm

1913

What Is Money?
By A. MITCHELL INNES

[ I do appreciate these references. ]

[Mar 21, 2017] Trump healthcare plan means less in income taxes on the rich and more in sales taxes for the rest of us

Mar 21, 2017 | economistsview.typepad.com
Peter K. -> pgl... March 20, 2017 at 06:37 AM , 2017 at 06:37 AM
"It means less in income taxes on the rich and more in sales taxes for the rest of us."

Nah glibertarians are against the sales tax because they see how it has increased in Europe and led to bigger government. That's why they're opposing Paul Ryan's tax reform which includes progressive wage subsidies.

pgl -> Peter K.... , March 20, 2017 at 09:45 AM
You must not get Paul Ryan. He wants a smaller government paid for exclusively by sales taxes. His agenda is to eliminate all taxes on capital income. FYI - Europe still has rather high profits taxes. Ryan's latest would end that for the US.
ken melvin -> anne... , -1
Congress critters from red states are demanding that people must have a job bin order to qualify for medicaid. In red states, most jobs don't pay enough to afford health care.

Explained to an environmental class the other day how it was that before EPA people knowingly (and unknowingly) took hazardous jobs in order to make a living -- a trade off. This is where these guys are headed.

Peter K. -> anne... , March 20, 2017 at 09:01 AM
http://cepr.net/blogs/beat-the-press/paul-krugman-and-the-republican-corporate-income-tax-proposal

Paul Krugman and the Republican Corporate Income Tax Proposal

by Dean Baker

Published: 28 January 2017

The current corporate income tax is a massive cesspool. There are so many routes for avoidance that it is almost becoming voluntary. This matters not only because we don't get the revenue we should from the tax, but also because it has created a massive tax avoidance industry.

The tax avoidance industry is a big deal. This is an industry that contributes nothing to the economy. It involves people designing clever tricks to allow corporations to avoid paying their share of taxes.

The tax avoidance industry is also an important source of inequality since it is possible to get very rich designing clever ways to avoid taxes. My colleague Eileen Appelbaum (along with Rose Batt) show how the private equity industry is largely a tax avoidance industry in their recent book Private Equity at Work. Many of the very richest people in the country got their wealth as private equity fund partners.

In his movie, Capitalism: A Love Story, Michael Moore highlighted "dead peasant" insurance policies. This is when a major company like Walmart buys life insurance policies on tens of thousands of front line workers, like checkout clerks. Usually the insuree doesn't even know of the existence of the policy, but if they die, the company collects.

Moore emphasized the morbid nature of this game, but missed the real story. The point of these policies is to smooth profits, partly to manipulate share prices, but also for tax purposes. The real highlight of this story is that there is someone who likely got very rich by developing dead peasant insurance policies, rather than contributing anything productive to the economy.

I mention this as background to the corporate income tax discussion since to my view a major goal of corporate tax reform is to eliminate the enormous opportunities for gaming that currently exist. These opportunities are making some people very rich and are a complete waste from an economic standpoint.


For this reason, I am sympathetic to the plan the Republicans are debating. In its conception it would be enormous simplification relative to the current system. Of course, that is the conception, we will have to see the plan as it is drafted in legislation to reach any final judgement.

In this vein, I have been unhappy to see some of the attacks leveled by people for whom I have considerable respect, notably Paul Krugman. In a post yesterday, Krugman makes the case that the basic tax proposal would be a subsidy for domestic production and therefore inconsistent with free trade principles.

While I don't disagree with the logic, I question its importance. He contrasts the border adjustment with the Republican tax proposal with the border adjustment with a traditional value-added tax (VAT), pointing out that the latter doesn't give a domestic production subsidy in the same way. There are two important points left out of Krugman's discussion.

The first is the issue of size. VATs in our trading partners typically raise well over ten percent of GDP in revenue and sometimes more than 20 percent. By contrast, the corporate income tax has raised less than 1.7 percent of GDP in recent years. The Republicans are undoubtedly looking to reduce this amount further in their tax reform (hopefully they will not succeed), but the imposition of a tax equal to 15 percent of GDP matters much more for trade than a tax equal to 1.7 percent of GDP. (Suppose the dollar falls or rises by 1.7 percent in a week, as it often does. This has the same impact.)

The second issue is the point of reference. We don't currently have a VAT in the United States. We have various taxes that are assessed in the production process, including the income tax workers pay on their wages, that get passed on in the price of the product. If we snapped our fingers and replaced the income tax with a value added tax, we would then refund this tax on exported products. That would look like an export subsidy, relative to our current system. Similarly, we would slap the VAT on all items that are imported. That would look like an import tariff, relative to our current system.

Conventionally, economists urge us not to worry about this issue, since changes in currency values will even things out. This is probably true, at least over the long-run, if not immediately in a transition process. This is a situation where we should accept the economists' conventional wisdom on the net effect on trade, remembering that the amount at stake as an export subsidy or import tariff is just not that large in any case.

The Republican tax proposal, when it is actually put on the table, should be evaluated based on the extent to which it eliminates the waste associated with the tax avoidance industry and also for the amount of revenue it raises. Arguing for its rejection based on it being an unfair subsidy for domestic production is just silly.

There are plenty of very real reasons not to like the things Republicans are putting forward in the Trump administration. We don't have to invent fake ones.

Peter K. -> anne... , March 20, 2017 at 09:01 AM
http://cepr.net/blogs/beat-the-press/washington-post-pushed-fear-on-corporate-tax-reform

Washington Post Pushed Fear on Corporate Tax Reform
by Dean Baker
Published: 29 January 2017

The headline warned readers that the Republican's proposal for reforming the corporate income tax is coming for your toys, literally:

"Trump-era tax reform could come for your toys."
Okay, we get it. The Washington Post doesn't like the tax reform and is not content to keep its views to the opinion pages. (This article ran at the top of the Sunday business section.)

The basic story is almost Trumpian in its unreality. The tax reform includes a border adjustment tax on imports. This is similar (not identical) to what countries with value-added taxes do, which is almost every other wealthy country. The conventional wisdom among economists is that currencies adjust so that the net effect on the price of imports, including toys, is minimal.

While this piece notes this argument, it implies that consumers and retailers have great cause for concern over the tax. In this respect, it is worth pointing out that currencies fluctuate by large amounts all the time, in ways that are likely to have far more impact on the price of imported toys than this tax. The figure below shows the inflation-adjusted value of the dollar measured against the currencies of our major trading partners.

fredgraph10

Note that the dollar fell by more than 25 percent against the currencies of our major trading partners in the years between its peak in 2002 and its trough in 2008. This would have sent the price of imported toys up by far more than the new tax possibly could, even though it never prompted an article in the Post warning readers that a falling dollar was coming for their toys.

As a practical matter, a currency adjustment will take time and may not be complete, but in the technical language of economists, so what? If the price of imported toys rises by 3–4 percent as a result of the tax, what would be the big deal. This change is swamped by movements in currency values that never even get mentioned. (I discuss the tax reform proposal, which could get rid of the tax avoidance industry, at more length here.)

It is also worth pointing out that incredible hypocrisy and/or ignorance underlying these discussions. If the United States is to get back to something closer to balanced trade, as opposed to having a trade deficit of more than $500 billion (around 2.7 percent of GDP), it is likely to require a lower valued dollar and higher import prices.

We can count on news outlets like the Post pointing out that the higher import prices mean that lower income people will have to pay more for imported goods at Walmart. This is true, but they are also more likely to be able to get relatively good paying jobs in manufacturing. Also, the availability of these jobs is likely to put upward pressure on the wages of less-educated workers more generally. The net effect for these people is almost certain to be positive.

If this is hard to understand, suppose we remove the protectionist barriers that allow our doctors to earn twice as much as doctors in other wealthy countries. This would likely cause the pay of our doctors to be more in line with pay in Europe and Canada (@ $150,000 a year, as opposed to an average of more than $250,000 a year now). The doctors would all benefit because they and their families would now pay less for their health care, or at least this is how it would be covered using the Washington Post standard.

[Mar 21, 2017] Why No One Is Taking Robert Samuelson's Medicaid Deal Seriously

Mar 21, 2017 | economistsview.typepad.com
anne : March 20, 2017 at 05:50 AM , 2017 at 05:50 AM
http://cepr.net/blogs/beat-the-press/why-no-one-is-taking-robert-samuelson-s-medicaid-deal-seriously

March 20, 2017

Why No One Is Taking Robert Samuelson's Medicaid Deal Seriously

Robert Samuelson put forward what would ordinarily be a very reasonable proposal on Medicaid and Medicare in his column * today. He suggested that the federal government take over the portion of Medicaid that deals with low-income elderly and fold it into the Medicare program, while leaving states with full responsibility for dealing with the part of Medicaid that deals with low-income families below retirement age.

While he is right that this sort of consolidation could likely reduce costs and prevent seniors from falling between the cracks in the two systems, there is a basic problem with turning Medicaid over to the states. There are a number of states controlled by Republicans where there is little or no interest in providing health care for low income families.

This means that if Medicaid were turned completely over to the states, millions of low income families would lose access to health care. For this reason, people who want to see low income families get health care, which is the purpose of Medicaid, want to see the program remain partly under the federal government's control.

* https://www.washingtonpost.com/opinions/medicaid-is-out-of-control-heres-how-to-fix-it/2017/03/19/05167e9e-0b2e-11e7-a15f-a58d4a988474_story.html

-- Dean Baker

pgl -> anne... , March 20, 2017 at 06:04 AM
"There are a number of states controlled by Republicans where there is little or no interest in providing health care for low income families. This means that if Medicaid were turned completely over to the states, millions of low income families would lose access to health care."

Dean Baker is right to go after this idea from Robert (no relationship to Paul) Samuelson but two additional comments.

(1) This is really the Paul Ryan agenda.

(2) For states like mine that will take care of these low income families, this Ryan agenda does not mean less in taxes. It means less in income taxes on the rich and more in sales taxes for the rest of us. The ultimate Paul Ryan agenda.

Anachronism said in reply to pgl... , March 20, 2017 at 06:56 AM
There are 2 theories about how to argue with a republican. Neither one works.

What they care about is "lessez faire", which means low income families should die off from lack of healthcare. If they deserved healthcare, they should have been able to afford it themselves.

RC AKA Darryl, Ron said in reply to Anachronism ... , March 20, 2017 at 07:16 AM
If God had wanted poor people to have healthcare then he would have made them be born rich :<)
pgl -> Anachronism ... , March 20, 2017 at 09:43 AM
I might ask what those two theories are but I suspect you are right about neither one of them working.

[Mar 21, 2017] Robots and Inequality: A Skeptics Take

Notable quotes:
"... And all costs are labor costs. It it isn't labor cost, it's rents and economic profit which mean economic inefficiency. An inefficient economy is unstable. Likely to crash or drive revolution. ..."
"... Free lunch economics seeks to make labor unnecessary or irrelevant. Labor cost is pure liability. ..."
"... Yet all the cash for consumption is labor cost, so if labor cost is a liability, then demand is a liability. ..."
"... Replace workers with robots, then robots must become consumers. ..."
"... "Replace workers with robots, then robots must become consumers." Well no - the OWNERS of robots must become consumers. ..."
"... I am old enough to remember the days of good public libraries, free university education, free bus passes for seniors and low land prices. Is the income side of the equation all that counts? ..."
Mar 21, 2017 | economistsview.typepad.com
Douglas Campbell:
Robots and Inequality: A Skeptic's Take : Paul Krugman presents " Robot Geometry " based on Ryan Avent 's "Productivity Paradox". It's more-or-less the skill-biased technological change hypothesis, repackaged. Technology makes workers more productive, which reduces demand for workers, as their effective supply increases. Workers still need to work, with a bad safety net, so they end up moving to low-productivity sectors with lower wages. Meanwhile, the low wages in these sectors makes it inefficient to invest in new technology.
My question: Are Reagan-Thatcher countries the only ones with robots? My image, perhaps it is wrong, is that plenty of robots operate in Japan and Germany too, and both countries are roughly just as technologically advanced as the US. But Japan and Germany haven't seen the same increase in inequality as the US and other Anglo countries after 1980 (graphs below). What can explain the dramatic differences in inequality across countries? Fairly blunt changes in labor market institutions, that's what. This goes back to Peter Temin's " Treaty of Detroit " paper and the oddly ignored series of papers by Piketty, Saez and coauthors which argues that changes in top marginal tax rates can largely explain the evolution of the Top 1% share of income across countries. (Actually, it goes back further -- people who work in Public Economics had "always" known that pre-tax income is sensitive to tax rates...) They also show that the story of inequality is really a story of incomes at the very top -- changes in other parts of the income distribution are far less dramatic. This evidence also is not suggestive of a story in which inequality is about the returns to skills, or computer usage, or the rise of trade with China. ...

mulp : , March 21, 2017 at 01:54 AM

Yet another economist bamboozled by free lunch economics.

In free lunch economics, you never consider demand impacted by labor cost changed.

TANSTAAFL so, cut labor costs and consumption must be cut.

Funny things can be done if money is printed and helicopter dropped unequally.

Printed money can accumulate in the hands of the rentier cutting labor costs and pocketing the savings without cutting prices.

Free lunch economics invented the idea price equals cost, but that is grossly distorting.

And all costs are labor costs. It it isn't labor cost, it's rents and economic profit which mean economic inefficiency. An inefficient economy is unstable. Likely to crash or drive revolution.

Free lunch economics seeks to make labor unnecessary or irrelevant. Labor cost is pure liability.

Yet all the cash for consumption is labor cost, so if labor cost is a liability, then demand is a liability.

Replace workers with robots, then robots must become consumers.

reason -> mulp... , March 21, 2017 at 03:47 AM
"Replace workers with robots, then robots must become consumers." Well no - the OWNERS of robots must become consumers.
reason : , March 21, 2017 at 03:35 AM
I am old enough to remember the days of good public libraries, free university education, free bus passes for seniors and low land prices. Is the income side of the equation all that counts?
anne : , March 21, 2017 at 06:37 AM
https://medium.com/@ryanavent_93844/the-productivity-paradox-aaf05e5e4aad#.brb0426mt

March 16, 2017

The productivity paradox
By Ryan Avent

People are worried about robots taking jobs. Driverless cars are around the corner. Restaurants and shops increasingly carry the option to order by touchscreen. Google's clever algorithms provide instant translations that are remarkably good.

But the economy does not feel like one undergoing a technology-driven productivity boom. In the late 1990s, tech optimism was everywhere. At the same time, wages and productivity were rocketing upward. The situation now is completely different. The most recent jobs reports in America and Britain tell the tale. Employment is growing, month after month after month. But wage growth is abysmal. So is productivity growth: not surprising in economies where there are lots of people on the job working for low pay.

The obvious conclusion, the one lots of people are drawing, is that the robot threat is totally overblown: the fantasy, perhaps, of a bubble-mad Silicon Valley - or an effort to distract from workers' real problems, trade and excessive corporate power. Generally speaking, the problem is not that we've got too much amazing new technology but too little.

This is not a strawman of my own invention. Robert Gordon makes this case. You can see Matt Yglesias make it here. * Duncan Weldon, for his part, writes: **

"We are debating a problem we don't have, rather than facing a real crisis that is the polar opposite. Productivity growth has slowed to a crawl over the last 15 or so years, business investment has fallen and wage growth has been weak. If the robot revolution truly was under way, we would see surging capital expenditure and soaring productivity. Right now, that would be a nice 'problem' to have. Instead we have the reality of weak growth and stagnant pay. The real and pressing concern when it comes to the jobs market and automation is that the robots aren't taking our jobs fast enough."

And in a recent blog post Paul Krugman concluded: *

"I'd note, however, that it remains peculiar how we're simultaneously worrying that robots will take all our jobs and bemoaning the stalling out of productivity growth. What is the story, really?"

What is the story, indeed. Let me see if I can tell one. Last fall I published a book: "The Wealth of Humans". In it I set out how rapid technological progress can coincide with lousy growth in pay and productivity. Start with this:

"Low labour costs discourage investments in labour-saving technology, potentially reducing productivity growth."

...

* http://www.vox.com/2015/7/27/9038829/automation-myth

** http://www.prospectmagazine.co.uk/magazine/droids-wont-steal-your-job-they-could-make-you-rich

*** https://krugman.blogs.nytimes.com/2017/02/24/maid-in-america/

anne -> anne... , March 21, 2017 at 06:38 AM
https://twitter.com/paulkrugman/status/843167658577182725

Paul Krugman @paulkrugman

But is Ryan Avent saying something different * from the assertion that recent technological progress is capital-biased? **

* https://medium.com/@ryanavent_93844/the-productivity-paradox-aaf05e5e4aad#.kmb49lrgd

** http://krugman.blogs.nytimes.com/2012/12/08/rise-of-the-robots/

If so, what?

https://krugman.blogs.nytimes.com/2012/12/26/capital-biased-technological-progress-an-example-wonkish/

11:30 AM - 18 Mar 2017

anne -> anne... , March 21, 2017 at 07:00 AM
This is an old concern in economics; it's "capital-biased technological change," which tends to shift the distribution of income away from workers to the owners of capital....

-- Paul Krugman

anne -> anne... , March 21, 2017 at 06:40 AM
http://krugman.blogs.nytimes.com/2012/12/08/rise-of-the-robots/

December 8, 2012

Rise of the Robots
By Paul Krugman

Catherine Rampell and Nick Wingfield write about the growing evidence * for "reshoring" of manufacturing to the United States. * They cite several reasons: rising wages in Asia; lower energy costs here; higher transportation costs. In a followup piece, ** however, Rampell cites another factor: robots.

"The most valuable part of each computer, a motherboard loaded with microprocessors and memory, is already largely made with robots, according to my colleague Quentin Hardy. People do things like fitting in batteries and snapping on screens.

"As more robots are built, largely by other robots, 'assembly can be done here as well as anywhere else,' said Rob Enderle, an analyst based in San Jose, California, who has been following the computer electronics industry for a quarter-century. 'That will replace most of the workers, though you will need a few people to manage the robots.' "

Robots mean that labor costs don't matter much, so you might as well locate in advanced countries with large markets and good infrastructure (which may soon not include us, but that's another issue). On the other hand, it's not good news for workers!

This is an old concern in economics; it's "capital-biased technological change," which tends to shift the distribution of income away from workers to the owners of capital.

Twenty years ago, when I was writing about globalization and inequality, capital bias didn't look like a big issue; the major changes in income distribution had been among workers (when you include hedge fund managers and CEOs among the workers), rather than between labor and capital. So the academic literature focused almost exclusively on "skill bias", supposedly explaining the rising college premium.

But the college premium hasn't risen for a while. What has happened, on the other hand, is a notable shift in income away from labor:

[Graph]

If this is the wave of the future, it makes nonsense of just about all the conventional wisdom on reducing inequality. Better education won't do much to reduce inequality if the big rewards simply go to those with the most assets. Creating an "opportunity society," or whatever it is the likes of Paul Ryan etc. are selling this week, won't do much if the most important asset you can have in life is, well, lots of assets inherited from your parents. And so on.

I think our eyes have been averted from the capital/labor dimension of inequality, for several reasons. It didn't seem crucial back in the 1990s, and not enough people (me included!) have looked up to notice that things have changed. It has echoes of old-fashioned Marxism - which shouldn't be a reason to ignore facts, but too often is. And it has really uncomfortable implications.

But I think we'd better start paying attention to those implications.

* http://www.nytimes.com/2012/12/07/technology/apple-to-resume-us-manufacturing.html

** http://economix.blogs.nytimes.com/2012/12/07/when-cheap-foreign-labor-gets-less-cheap/

anne -> anne... , March 21, 2017 at 06:43 AM
https://fred.stlouisfed.org/graph/?g=d4ZY

January 30, 2017

Compensation of employees as a share of Gross Domestic Income, 1948-2015


https://fred.stlouisfed.org/graph/?g=d507

January 30, 2017

Compensation of employees as a share of Gross Domestic Income, 1948-2015

(Indexed to 1948)

supersaurus -> anne... , March 21, 2017 at 01:23 PM
"The most valuable part of each computer, a motherboard loaded with microprocessors and memory, is already largely made with robots, according to my colleague Quentin Hardy. People do things like fitting in batteries and snapping on screens.

"...already largely made..."? already? circuit boards were almost entirely populated by machines by 1985, and after the rise of surface mount technology you could drop the "almost". in 1990 a single machine could place 40k+/hour parts small enough they were hard to pick up with fingers.

anne : , March 21, 2017 at 06:37 AM
https://krugman.blogs.nytimes.com/2017/03/20/robot-geometry-very-wonkish/

March 20, 2017

Robot Geometry (Very Wonkish)
By Paul Krugman

And now for something completely different. Ryan Avent has a nice summary * of the argument in his recent book, trying to explain how dramatic technological change can go along with stagnant real wages and slowish productivity growth. As I understand it, he's arguing that the big tech changes are happening in a limited sector of the economy, and are driving workers into lower-wage and lower-productivity occupations.

But I have to admit that I was having a bit of a hard time wrapping my mind around exactly what he's saying, or how to picture this in terms of standard economic frameworks. So I found myself wanting to see how much of his story could be captured in a small general equilibrium model - basically the kind of model I learned many years ago when studying the old trade theory.

Actually, my sense is that this kind of analysis is a bit of a lost art. There was a time when most of trade theory revolved around diagrams illustrating two-country, two-good, two-factor models; these days, not so much. And it's true that little models can be misleading, and geometric reasoning can suck you in way too much. It's also true, however, that this style of modeling can help a lot in thinking through how the pieces of an economy fit together, in ways that algebra or verbal storytelling can't.

So, an exercise in either clarification or nostalgia - not sure which - using a framework that is basically the Lerner diagram, ** adapted to a different issue.

Imagine an economy that produces only one good, but can do so using two techniques, A and B, one capital-intensive, one labor-intensive. I represent these techniques in Figure 1 by showing their unit input coefficients:

[Figure 1]

Here AB is the economy's unit isoquant, the various combinations of K and L it can use to produce one unit of output. E is the economy's factor endowment; as long as the aggregate ratio of K to L is between the factor intensities of the two techniques, both will be used. In that case, the wage-rental ratio will be the slope of the line AB.

Wait, there's more. Since any point on the line passing through A and B has the same value, the place where it hits the horizontal axis is the amount of labor it takes to buy one unit of output, the inverse of the real wage rate. And total output is the ratio of the distance along the ray to E divided by the distance to AB, so that distance is 1/GDP.

You can also derive the allocation of resources between A and B; not to clutter up the diagram even further, I show this in Figure 2, which uses the K/L ratios of the two techniques and the overall endowment E:

[Figure 2]

Now, Avent's story. I think it can be represented as technical progress in A, perhaps also making A even more capital-intensive. So this would amount to a movement southwest to a point like A' in Figure 3:

[Figure 3]

We can see right away that this will lead to a fall in the real wage, because 1/w must rise. GDP and hence productivity does rise, but maybe not by much if the economy was mostly using the labor-intensive technique.

And what about allocation of labor between sectors? We can see this in Figure 4, where capital-using technical progress in A actually leads to a higher share of the work force being employed in labor-intensive B:

[Figure 4]

So yes, it is possible for a simple general equilibrium analysis to capture a lot of what Avent is saying. That does not, of course, mean that he's empirically right. And there are other things in his argument, such as hypothesized effects on the direction of innovation, that aren't in here.

But I, at least, find this way of looking at it somewhat clarifying - which, to be honest, may say more about my weirdness and intellectual age than it does about the subject.

* https://medium.com/@ryanavent_93844/the-productivity-paradox-aaf05e5e4aad#.v9et5b98y

** http://www-personal.umich.edu/~alandear/writings/Lerner.pdf

Shah of Bratpuhr : , March 21, 2017 at 07:27 AM
Median Wealth per adult (table ends at $40k)

1. Switzerland $244,002
2. Iceland $188,088
3. Australia $162,815
4. Belgium $154,815
5. New Zealand $135,755
6. Norway $135,012
7. Luxembourg $125,452
8. Japan $120,493
9. United Kingdom $107,865
10. Italy $104,105
11. Singapore $101,386
12. France $ 99,923
13. Canada $ 96,664
14. Netherlands $ 81,118
15. Ireland $ 80,668
16. Qatar $ 74,820
17. Korea $ 64,686
18. Taiwan $ 63,134
19. United Arab Emirates $ 62,332
20. Spain $ 56,500
21. Malta $ 54,562
22. Israel $ 54,384
23. Greece $ 53,266
24. Austria $ 52,519
25. Finland $ 52,427
26. Denmark $ 52,279
27. United States $ 44,977
28. Germany $ 42,833
29. Kuwait $ 40,803

http://www.middleclasspoliticaleconomist.com/2017/03/us-has-worst-wealth-inequality-of-any.html

reason -> Shah of Bratpuhr... , March 21, 2017 at 08:17 AM
I think this illustrates my point very clearly. If you had charts of wealth by age it would be even clearer. Without a knowledge of the discounted expected value of public pensions it is hard to draw any conclusions from this list.

I know very definitely that in Australia and the UK people are very reliant on superannuation and housing assets. In both Australia and the UK it is common to sell expensive housing in the capital and move to cheaper coastal locations upon retirement, investing the capital to provide retirement income. Hence a larger median wealth is NEEDED.

It is hard otherwise to explain the much higher median wealth in Australia and the UK.

Shah of Bratpuhr : , March 21, 2017 at 07:28 AM
Median Wealth Average Wealth

1. United States $ 44,977 $344,692 7.66
2. Denmark $ 52,279 $259,816 4.97
3. Germany $ 42,833 $185,175 4.32
4. Austria $ 52,519 $206,002 3.92
5. Israel $ 54,384 $176,263 3.24
6. Kuwait $ 40,803 $119,038 2.92
7. Finland $ 52,427 $146,733 2.80
8. Canada $ 96,664 $270,179 2.80
9. Taiwan $ 63,134 $172,847 2.74
10. Singapore $101,386 $276,885 2.73
11. United Kingdom $107,865 $288,808 2.68
12. Ireland $ 80,668 $214,589 2.66
13. Luxembourg $125,452 $316,466 2.52
14. Korea $ 64,686 $159,914 2.47
15. France $ 99,923 $244,365 2.45
16. United Arab Emirates $ 62,332 $151,098 2.42
17. Norway $135,012 $312,339 2.31
18. Australia $162,815 $375,573 2.31
19. Switzerland $244,002 $561,854 2.30
20. Netherlands $ 81,118 $184,378 2.27
21. New Zealand $135,755 $298,930 2.20
22. Iceland $188,088 $408,595 2.17
23. Qatar $ 74,820 $161,666 2.16
24. Malta $ 54,562 $116,185 2.13
25. Spain $ 56,500 $116,320 2.06
26. Greece $ 53,266 $103,569 1.94
27. Italy $104,105 $202,288 1.94
28. Japan $120,493 $230,946 1.92
29. Belgium $154,815 $270,613 1.75

http://www.middleclasspoliticaleconomist.com/2017/03/us-has-worst-wealth-inequality-of-any.html

spencer : , March 21, 2017 at 08:06 AM
Ryan Avent's analysis demonstrates what is wrong with the libertarian, right wing belief that cheap labor is the answer to every problem when in truth cheap labor is the source of many of our problems.
reason -> spencer... , March 21, 2017 at 08:22 AM
Spencer,
as I have said before, I don't really care to much what wages are - I care about income. It is low income that is the problem. I'm a UBI guy, if money is spread around, and workers can say no to exploitation, low wages will not be a problem.
Sanjait : , March 21, 2017 at 09:32 AM
This looks good, but also reductive.

Have we not seen a massive shift in pretax income distribution? Yes ... which tells me that changes in tax rate structures are not the only culprit. Though they are an important culprit.

reason -> Sanjait... , March 21, 2017 at 09:40 AM
Maybe - but
1. changes in taxes can affect incentives (especially think of real investment and corporate taxes and also personal income taxes and executive remuneration);
2. changes in the distribution of purchasing power can effect the way growth in the economy occurs;
3. changes in taxes also affect government spending and government spending tends to be more progressively distributed than private income.

Remember the rule: ceteris is NEVER paribus.

Longtooth : , March 21, 2017 at 12:28 PM
Word to the wise:

Think: Services and Goods

Composite Services labor hours increase with poor productivity growth - output per hour of labor input. Composite measure of service industry output is notoriously problematic (per BLS BEA).

Goods labor hours decrease with increasing productivity growth. Goods output per hour easy to measure and with the greatest experience and knowledge.

Put this together and composite national productivity growth rate can't grow as fast as services consume more of labor hours.

Simple arithmetic.

Elaboration on Services productivity measures:

Now add the composite retail clerk labor hours to engineering labor hours... which dominates in composite labor hours? Duh! So even in services the productivity is weighted heavily to the lowest productivity job market.

Substitute Hospitality services for Retail Clerk services. Substitute truck drivers services for Hospitality Services, etc., etc., etc.

I have spent years tracking productivity in goods production of various types ... mining, non-tech hardware production, high tech hardware production in various sectors of high tech. The present rates of productivity growth continue to climb (never decline) relative to the past rates in each goods production sector measured by themselves.

But the proportion of hours in goods production in U.S. is and has been in continual decline even while value of output has increased in each sector of goods production.

Here's an interesting way to start thinking about Services productivity.

There used to be reasonably large services sector in leisure and business travel agents. Now there is nearly none... this has been replaced by on-line computer based booking. So travel agent or equivalent labor hours is now near zippo. Productivity of travel agents went through the roof in the 1990's & 2000's as the number of people / labor hours dropped like a rock. Where did those labor hours end up? They went to lower paying services or left the labor market entirely. So lower paying lower productivity services increased as a proportion of all services, which in composite reduced total serviced productivity.

You can do the same analysis for hundreds of service jobs that no longer even exist at all --- switch board operators for example when the way of buggy whip makers and horse-shoe services).

Now take a little ride into the future... not to distant future. When autonomous vehicles become the norm or even a large proportion of vehicles, and commercial drivers (taxi's, trucking, delivery services) go the way of horse-shoe services the labor hours for those services (land transportation of goods & people) will drop precipitously, even as unit deliveries increase, productivity goes through the roof, but since there's almost no labor hours in that service the composite effect on productivity in services will drop because the displaced labor hours will end up in a lower productivity services sector or out of the elabor market entirely.

Longtooth -> Longtooth... , March 21, 2017 at 12:42 PM
Economists are having problems reconciling composite productivity growth rates with increasing rates of automation. So they end up saying "no evidence" of automation taking jobs or something to the effect "not to fear, robotics isn't evident as a problem we have to worry about".

But they know by observation all around them that automation is increasing productivity in the goods sector, so they can't really discount automation as an issue without shutting their eyes to everything they see with their "lying eyes". Thus they know deep down that they will have to be reconcile this with BLS and BEA measures.

Ten years aog this wasn't even on economist's radars. Today it's at least being looked into with more serious effort.

Ten years ago politicians weren't even aware of the possibility of any issues with increasing rates of automation... they thought it's always increased with increasing labor demand and growth, so why would that ever change? Ten years ago they concluded it couldn't without even thinking about it for a moment. Today it's on their radar at least as something that bears perhaps a little more thought.

Not to worry though... in ten more years they'll either have real reason to worry staring them in the face, or they'll have figured out why they were so blind before.

Reminds me of not recognizing the "shadow banking" enterprises that they didn't see either until after the fact.

Longtooth -> Longtooth... , March 21, 2017 at 12:48 PM
Or that they thought the risk rating agencies were providing independent and valid risk analysis so the economists couldn't reconcile the "low level" of market risks risk with everything else so they just assumed "everything" else was really ok too... must be "irrational exuberance" that's to blame.
Longtooth : , March 21, 2017 at 01:04 PM
Let me add that the term "robotics" is a subset of automation. The major distinction is only that a form of automation that includes some type of 'articulation' and/or some type of dynamic decision making on the fly (computational branching decision making in nano second speeds) is termed 'robotics' because articulation and dynamic decision making are associated with human capabilities rather then automatic machines.

It makes no difference whether productivity gains occur by an articulated machine or one that isn't... automation just means replacing people's labor with something that improves humans capacity to produce an output.

When mechanical leverage was invented 3000 or more years ago it was a form of automation, enabling humans to lift, move heavier objects with less human effort (less human energy).

Longtooth -> Longtooth... , March 21, 2017 at 01:18 PM
I meant 3000 years BC.... 5000 years ago or more.

[Mar 21, 2017] It has long been a mystery to me why European nations adopt policies that hurt their economies just to pander to the whims of US geopolitics. Cases in point: sanctions on Iran and Russia and support for Israel

Notable quotes:
"... Past administrations of both parties have been vigorous supporters of longer and stronger patent and copyright protections. These protections can raise the price of protected items by factors of ten or even a hundred, making them equivalent to tariffs of 1000 and 10,000 percent. These protections lead to the same sorts of economic distortion and corruption that economists would predict from tariffs of this size. ..."
"... Trump administration officials at a Group of 20 summit rejected concerns about spreading protectionism and made clear that the new administration would seek different approaches to global commerce. ..."
"... The United States influence over the Group of 20 nations, even when the US is supposedly taking generally unpopular stances is striking and makes me wonder why there is no open dissent. What is supposed to be unpopular may be less so among G20 governments than commonly assumed. ..."
Mar 21, 2017 | economistsview.typepad.com
anne : March 20, 2017 at 05:43 AM

http://cepr.net/blogs/beat-the-press/the-united-states-has-been-for-selective-protectionism-not-free-trade

March 20, 2017

The United States Has Been for Selective Protectionism, Not Free Trade

The New York Times might have wrongly lead readers to believe that presidents prior to Donald Trump supported free trade in an article * noting his refusal to go along with a G-20 statement proclaiming the importance of free trade. This is not true.

Past administrations of both parties have been vigorous supporters of longer and stronger patent and copyright protections. These protections can raise the price of protected items by factors of ten or even a hundred, making them equivalent to tariffs of 1000 and 10,000 percent. These protections lead to the same sorts of economic distortion and corruption that economists would predict from tariffs of this size.

Past administrations have also supported barriers that protect our most highly paid professionals, such as doctors and dentists, from foreign competition. They apparently believed that these professionals lack the skills necessary to compete in the global economy and therefore must be protected from the international competition. The result is that the rest of us pay close to $100 billion more each year for our medical bills ($700 per family).

* https://www.nytimes.com/2017/03/18/business/group-of-20-summit-us-trade.html

-- Dean Baker

anne -> anne... , March 20, 2017 at 05:45 AM
https://www.nytimes.com/2017/03/18/business/group-of-20-summit-us-trade.html

March 18, 2017

U.S. Breaks With Allies Over Trade Issues Amid Trump's 'America First' Vows
By JACK EWING

Trump administration officials at a Group of 20 summit rejected concerns about spreading protectionism and made clear that the new administration would seek different approaches to global commerce.

anne -> anne... , March 20, 2017 at 05:47 AM
https://twitter.com/BenjaminNorton/status/843565279359766529

Ben Norton‏ @BenjaminNorton

US forced G20 nations in joint statement to drop any mention of climate change, which threatens life on Earth

http://www.independent.co.uk/news/world/politics/g20-finance-ministers-statement-climate-change-fair-trade-trump-a7636956.html

Financial officials from the world's biggest economies have dropped from a joint statement any mention of financing action on climate change, reportedly following pressure from the US and Saudi Arabia....

1:50 PM - 19 Mar 2017

anne -> anne... , March 20, 2017 at 05:49 AM
The United States influence over the Group of 20 nations, even when the US is supposedly taking generally unpopular stances is striking and makes me wonder why there is no open dissent. What is supposed to be unpopular may be less so among G20 governments than commonly assumed.
JohnH -> anne... , March 20, 2017 at 07:43 AM
It has long been a mystery to me why European nations adopt policies that hurt their economies just to pander to the whims of US geopolitics. Cases in point: sanctions on Iran and Russia and support for Israel.

[Mar 21, 2017] what are the main reasons for the rise in concentration

Mar 21, 2017 | economistsview.typepad.com
pgl : Monday, March 20, 2017 at 01:28 AM , March 20, 2017 at 01:28 AM
ProMarket: "Q: In your opinion, what are the main reasons for the rise in concentration?

There is no single over-riding cause, but rather several factors that have contributed to the reduction in competition. I would divide the list into factors that are "natural," "strategic," and "policy."

Natural factors include such fundamental economic forces as network sectors which do not favor fragmented industries and have taken on greater importance in the economy. Strategic forces are efforts by incumbents to insulate themselves against entry by creating barriers (controlling distribution systems, patents, etc.) and by using the regulatory process to handicap entrants (Tesla, Uber, the professions, etc.). Policy factors include the shift in antitrust enforcement away from challenges to "rising-concentration" mergers, the considerable deference being paid to dominant firms (Google, Amazon), weaknesses of remedy policy, and the inability to prevent the development of many strategic barriers."

In other words - the strategy has been to limit competition because the policy makers have been asleep at the wheel.

RC AKA Darryl, Ron -> pgl... , March 20, 2017 at 03:38 AM
For a very long time. I consider "There Is Convincing Evidence That Concentration Has Been Rising" to be the understatement of the year and in the running for understatement of the century. I first noticed an excessive rate of M&A while still in high school in the mid-sixties. This is not even a case of better late than never. This is closing the barn door after we get a letter from the horse vacationing half way around the world.
RC AKA Darryl, Ron -> RC AKA Darryl, Ron... , March 20, 2017 at 03:40 AM
Correction: "...This is JUST TALKING ABOUT closing the barn door after we get a letter from the horse vacationing half way around the world."
JohnH -> pgl... , March 20, 2017 at 07:33 AM
"policy makers have been asleep at the wheel"

The closest that pgl can ever come to acknowledging that Obama was responsible...

DrDick -> pgl... , March 20, 2017 at 08:14 AM
You are far too generous. Policy makers have not been asleep, they have deliberately shut their eyes and turned away under Republicans for almost 40 years and, sadly, the Obama administration was not much better.
point -> DrDick... , March 20, 2017 at 08:23 AM
If we could lift the sheets, we might find an underlying policy of *promoting* concentration, to be even less generous.

In any event, it appears the scholar in the article is ignorant of supplier markets or chooses to not mention them. But buyer power seems to be the best route to excess margins in a low ROI world.

yuan -> pgl... , March 20, 2017 at 08:19 AM
"In other words - the strategy has been to limit competition because the policy makers have been asleep at the wheel."

Is "sleeping at the wheel" a euphemism for being captured by concentrated wealth?

https://www.youtube.com/watch?v=8y06NSBBRtY

"Autor and co-authors have developed and tested a "superstar" model in which markets are increasingly dominated by heterogeneous firms and a winner-take-all competitive process that favors those using lower labor."

Maybe, just maybe, winner-take-all economics (e.g. capitalism) is *the* problem.

==The life of a single human being is worth a million times more than all the property of the richest man on earth.==

―Ernesto G.

Peter K. -> pgl... , March 20, 2017 at 08:53 AM
"the policy makers have been asleep at the wheel."

And PGL was for Hillary who only made the most minimal noises about market concentration and anti-trust. No doubt she'd continue Obama's policy of being "asleep at the wheel."

No doubt that's what their campaign contributors wanted. And then PGL can write blog posts complaining about it while he attacked Bernie Bros during the primary.

Hypocrisy?

[Mar 20, 2017] The Fake Freedom of American

Mar 20, 2017 | economistsview.typepad.com
Fred C. Dobbs : March 19, 2017 at 06:07 AM , 2017 at 06:07 AM
'If you really want to free Americans and unburden
American employers, why not try, or at least seriously consider, some form of government-managed health care,
like almost every other capitalist democracy? There
are many ways of giving people choice and excellent
care under government management. Universal publicly
managed health coverage would even free America's corporations and businesses to streamline their
operations, releasing them from bureaucratic
obligations that ... look weirdly socialist.
Would this mean they would have to pay
more in taxes? Possibly.'

(Not 'Possibly'. Inevitably. So be it.)

The Fake Freedom of American
Health Care https://nyti.ms/2nDNgAm
NYT - ANU PARTANEN - MARCH 18, 2017

Last week the nonpartisan Congressional Budget Office estimated that the new Republican health plan would increase the number of uninsured Americans by 24 million people within a decade, mostly because changes in regulations, subsidies and Medicaid coverage would make insurance too expensive for them.

Republican leaders seem unfazed by this, perhaps because, in their minds, deciding not to have health care because it's too expensive is an exercise of individual free will. As Representative Jason Chaffetz, Republican of Utah, put it: "Americans have choices. And they've got to make a choice. And so maybe, rather than getting that new iPhone that they just love, and they want to go spend hundreds of dollars on that, maybe they should invest in their own health care."

There is an appealing logic to such thinking. The idea is that buying health care is like buying anything else. The United States is home to some of the world's best medical schools, doctors, research institutes and hospitals, and if you have the money for the coverage and procedures you want, you absolutely can get top-notch care. This approach might result in extreme inequalities and it might be expensive, but it definitely buys you the best medical treatment anywhere. Such is the cost of freedom. As House Speaker Paul Ryan put it in a tweet: "Freedom is the ability to buy what you want to fit what you need." Vice President Mike Pence picked up that baton: "Obamacare will be replaced with something that actually works - bringing freedom and individual responsibility back to American health care."

In practice, though, this Republican notion is an awfully peculiar kind of freedom. It requires most Americans to spend not just money, but also time and energy agonizing over the bewildering logistics of coverage and treatment - confusing plans, exorbitant premiums and deductibles, exclusive networks, mysterious tests, outrageous drug prices. And more often than not, individual choices are severely restricted by decisions made by employers, insurers, doctors, pharmaceutical companies and other private players. Those interest groups, not the consumer, decide which plans are available, what those plans cover, which doctors patients can see and how much it will cost.

And I haven't even mentioned the millions of Americans who don't earn enough to pay for insurance or a lifesaving treatment. If you can't afford it, not buying it is hardly a choice.

Eight years ago I moved to the United States from Finland, which like all the Nordic nations is a wealthy capitalist economy, despite the stereotypes you may have heard. And like all those countries, Finland has invested in a universal, taxpayer-funded and publicly managed health care system. Finns constantly debate the shortcomings of their system and are working to improve it, but in Finland I never worried about where my medical care came from or whether I could afford it. I paid my income taxes - which, again despite the stereotypes, were about the same as what I pay in federal, state and local income taxes in New York City - and if I needed to see a doctor, I had several options.

For minor medical matters, I could visit a private physician who was provided as a perk by my employer. Or I could call the public clinic closest to my home. If I saw the private doctor, my employer picked up the tab, with the help of public subsidies. If I went to the public clinic, it might cost me a small co-payment, usually around $20. Had I been pregnant, most care would have been free.

If I had wanted to, I also could have easily paid to see a private doctor on my own, again with the help of public subsidies. All of this works without anyone ever having to sign up for or buy health insurance unless he wants additional coverage. I never had to worry whether I was covered. All Finns are covered for all essential medical care automatically, regardless of employment or income.

Republicans are fond of criticizing this sort of European-style health care. President Trump has called Canada's national health care system "catastrophic." On CNN recently, Senator Ted Cruz gave multiple examples of how patients in countries with universal, government-managed health care get less care than Americans.

In Europe, he said, elderly people facing life-threatening diseases are often placed in palliative care and essentially told it's their time to go. According to the Republican orthodoxy, government always takes away not only people's freedom to choose their doctor, but also their doctor's ability to choose the correct care for patients. People are at the mercy of bureaucrats. Waiting times are long. Quality of care is dismal.

But are Republicans right about this? Practically every wealthy capitalist democracy in the world has decided that some form of government-managed universal health care is the most sensible and effective option. According to the latest report of the O.E.C.D. - an organization of mostly wealthy nations - the United States as a whole does not actually outshine other countries in the quality of care.

In fact, the United States has shorter life expectancy, higher infant mortality and fewer doctors per capita than most other developed countries. When it comes to outcomes in some illnesses, including cancer, the United States does have some of the best survival rates in the world - but that's barely ahead of, or even slightly behind, the equivalent survival rates in other developed countries. In breast cancer survival, for example, the United States comes in second, after Sweden. Third-best is Norway, then Finland. All three countries have universal, government-run health care systems.

For colorectal cancer, the five-year survival rate after diagnosis in the United States brings it to a not very impressive ninth place in the O.E.C.D. statistics. Ahead of the United States are South Korea, Israel, Australia, Sweden and Finland, all with some form of government-managed universal health care. And when it comes to cervical cancer, American women are at a significant disadvantage: The United States comes in only 22nd. Meanwhile, life expectancy at age 65 is higher in 24 other developed nations, including Canada, Britain and most European nations.

Americans might still assume that long waits for care are inevitable in a health care system run by the government. But that's not necessarily the case either. A report in 2014 by the Commonwealth Fund, a private foundation specializing in health care research, ranked the United States third in the world in access to specialists. That's a great achievement. But the Netherlands and Switzerland did better. When it comes to nonemergency and elective surgery, patients in several countries, including the Netherlands, Germany and Switzerland, all of which have universal, government-guided health care systems, have faster access than the United States.

It's not just American patients who endure endless bureaucratic hassles. American doctors were also significantly more likely to report as major problems the amount of time they spent on dealing with administrative burdens related to insurance and claims, as well as on getting patients medications or treatment because of restrictions imposed by insurance companies, compared with doctors in most of the other 10 countries studied - including Sweden and Britain.

Overall, Americans spend far more of their hard-earned money on health care than citizens of any other country, by a very wide margin. This means that it is in fact Americans who are getting a raw deal. Americans pay much more than people in other countries but do not get significantly better results.

The trouble with a free-market approach is that health care is an immensely complicated and expensive industry, in which the individual rarely has much actual market power. It is not like buying a consumer product, where choosing not to buy will not endanger one's life. It's also not like buying some other service tailored to individual demands, because for the most part we can't predict our future health care needs.

The point of universal coverage is to pool risk, for the maximum benefit of the individual when he or she needs care. And the point of having the government manage this complicated service is not to take freedom away from the individual. The point is the opposite: to give people more freedom. Arranging health care is an overwhelming task, and having a specialized entity do the negotiating, regulating and perhaps even much of the providing is just vastly more efficient than forcing everyone to go it alone.

What passes for an American health care system today certainly has not made me feel freer. Having to arrange so many aspects of care myself, while also having to navigate the ever-changing maze of plans, prices and the scarcity of appointments available with good doctors in my network, has thrown me, along with huge numbers of Americans, into a state of constant stress. And I haven't even been seriously sick or injured yet.

As a United States citizen now, I wish Americans could experience the freedom of knowing that the health care system will always be there for us regardless of our employment status. I wish we were free to assume that our doctors get paid a salary to look after our best interests, not to profit by generating billable tests and procedures. I want the freedom to know that the system will automatically take me and my family in, without my having to battle for care in my moment of weakness and need. That is real freedom.

So is the freedom of knowing that none of it will bankrupt us. That is the freedom I had back in Finland.

Here is my appeal to Republicans: If you really want to free Americans and unburden American employers, why not try, or at least seriously consider, some form of government-managed health care, like almost every other capitalist democracy? There are many ways of giving people choice and excellent care under government management. Universal publicly managed health coverage would even free America's corporations and businesses to streamline their operations, releasing them from bureaucratic obligations that to me, coming from Finland, I have to say look weirdly socialist. Would this mean they would have to pay more in taxes? Possibly.

Many countries require employers and employees to contribute to the health care system through payroll taxes, more than the United States does. But again, Americans are paying far more for health care than anyone else, and America's businesses are stuck managing this mess. It's true that in countries with universal health care the cost of hiring a new employee can be significant, especially for a small employer. Yet these countries still have plenty of thriving businesses, with lower administrative burdens. It can be done.

In wealthy capitalist democracies all around the world the government itself also has an essential kind of freedom. It's a freedom that enables the government to do work on behalf of the citizens who elect it, including negotiating the prices of health care with providers and pharmaceutical companies - a policy that has led to lower drug prices in those countries.

Americans today are paying vastly more in money, worry and hassle for the same, and sometimes worse, care than people in other wealthy capitalist democracies. Some Americans have coverage that serves them well, but judging by the current mood, the number of Americans who think the system needs to change is growing. No health care system is perfect. But in a nation that purports to champion freedom, the outdated disaster that is the United States health care system is taking that freedom away.

[Mar 20, 2017] http://finance.yahoo.com/news/yellens-exit-may-prompt-fed-131425916.html

Mar 20, 2017 | finance.yahoo.com

Yellen's exit may prompt the Fed to pare its balance sheet sooner rather than later, Goldman says

Javier E. David

CNBCMarch 19, 2017

Yellen's exit may prompt the Fed to pare its balance sheet sooner rather than later, Goldman says

Yuri Gripas | Reuters

It's often said that good things come to those who wait - but a bloated $4.5 trillion balance sheet might be a notable exception to that rule.

With the Federal Reserve facing a Herculean conundrum in unwinding its crisis-era monetary policy - and a likely leadership transition on the horizon - Goldman Sachs (GS) suggested on Saturday the central bank could move early to reduce the vast sums of government and mortgage-backed securities (MBS) it holds on its books.

In a research note to clients, the bank pointed to the likelihood that President Donald Trump may "reshape the leadership" of the Federal Open Market Committee (FOMC), the Fed's powerful policy-making body, as the terms of Fed Chair Janet Yellen and Vice Chair Stanley Fischer expire in early 2018.

"This could be important for balance sheet policy because many Republican-leaning economists have criticized quantitative easing (QE) and have expressed a preference for rapid balance sheet rundown, perhaps even through asset sales," wrote Daan Struyven, a Goldman economist.

If the new appointments-especially the new chair-are thought to favor aggressive balance sheet normalization, perhaps even including asset sales, and if all decisions are left up to the incoming team, financial markets might experience heightened uncertainty during the transition."

Goldman suggested there was a "strong 'risk management' case for an announcement of very gradual balance sheet runoff later this year," because of the political risk associated with new leadership at the Fed.

"Our forecast is that the discussion around reinvestment continues for most of this year and the plan is formally announced in December 2017," Struyven said. "At that meeting, we expect the committee to hold the funds rate steady after hiking in both June and September. We expect the quarterly hikes to resume in March 2018."

The economist harked back to 2013's "taper tantrum," in which markets reacted the Fed's suggestions of tighter monetary policy by sending bond yields surging and stocks reeling - albeit temporarily.

A potential fire sale of Treasurys and mortgage-backed securities by the Fed "could have significantly more adverse effects on financial conditions than gradual runoff, and the mere risk of such an outcome might set up another 'taper tantrum,' " Struyven added.

'The uncertainty is substantial'

As the central bank begins a campaign to tighten benchmark interest rates - making a quarter-point hike just last week - it's renewed a debate over how to unwind the Fed's massive bond buying program.


Some market observers have long argued that the Fed has distorted financial conditions with QE, and the central bank faces a huge task trying to pare down its bloated balance sheet.

"The bigger the Fed's credit footprint, the more it interferes with the efficient employment and pricing of credit," wrote George Selgin, a senior fellow and director of the Center for Monetary and Financial Alternatives at the libertarian-leaning Cato Institute, in a blog post last month.

"By directing a large share of savings to purchases of longer-term MBS and Treasury securities, for example, the Fed has artificially raised both the prices of those securities, and the importance of the housing market and the federal government relative to the rest of the U.S. economy," Selgin wrote. "It has also dramatically increased its portfolio's duration gap and, by so doing, the risk that it will suffer losses should it sell assets before they mature."

On Friday, Minneapolis Federal Reserve Bank President Neel Kashkari, the lone dissenter against the U.S. central bank's decision last week to raise interest rates, the U.S. economy is still falling short on employment and inflation.

Kashkari, an alumnus of both Goldman Sachs and the U.S. Treasury who oversaw the government's Temporary Asset Relief Program (TARP) during the financial crisis, believes the Fed should wait on raising interest rates until it publishes a detailed plan for how and when it will reduce its $4.5 trillion balance sheet.

Goldman set forth two scenarios under which the Fed could begin trimming its balance sheet. Under an "early start, passive runoff" scenario, the bank said the Fed "gradually tapers reinvestment in December 2017 over 10 months but does not sell assets."

Conversely, under a "late start, active sales" scenario, Goldman said the Fed could cease reinvesting in bonds in July 2018 "without tapering and actively sells $40bn of assets per month."

Under the latter, the Fed could shrink its balance sheet by about $250 billion per quarter starting in the second half of next year, "with similar contributions from maturing assets and active sales," the bank added.

However, neither scenario is without its risks, Goldman's economist wrote: "While our baseline estimate suggests relatively little tightening from balance sheet rundown, the uncertainty is substantial. The 2013 'taper tantrum' also provides a reminder that the impact of balance sheet policy on financial conditions is uncertain and could be larger than our baseline estimate."