Entries by Skeptic (576)

Tuesday
Jul152008

America founded as a Christian nation?

Geoffrey Stone, University of Chicago professor of constitutional law, delivered this lecture to refute the frequent contemporary assertions of the Christian Right that America was founded as a Christian nation. The lecture is 43 minutes followed by 19 minutes of good Q/A. I had planned to look into this topic someday and was glad to get the RSS feed that led to my listening to the whole thing and feeling it was time well spent.

Stone quotes extensively from the writings of Franklin, Jefferson, Adams, Washington, and Payne to show that, while only Payne was openly hostile to Christianity, none was a practicing Christian or active in any church. All subscribed to Deism, which was a rational, scientific view of a non-interfering Creator that developed in the Enlightenment movement, the same Enlightenment that produced the ideas that colonies might declare their independence from a king and create a republican nation in which the people were declared sovereign. Stone also discusses the views of other Founding Fathers but in less detail.

There are references in the Declaration of Independence, penned mostly by Jefferson, that refer to a supreme being, but the words used, such as "providence," are typical of Deism terminology. None of the traditional ways of referring to the Christian God are used at all, and certainly there is no reference to Jesus, whose divinity was uniformly rejected by Deists, as they rejected many other core Christian doctrines.

At a difficult moment in the Constitutional Convention, Franklin suggested that they all pause and pray, but this suggestion was rejected by silence.

In America's first treaty, with the Bey of Tripoli, in 1796, this statement appears in Article 11:

As the government of the United States of America is not, in any sense, founded on the Christian religion; as it has in itself no character of enmity against the laws, character, or tranquility, of Mussulmen; and, as the said States never entered into any war, or act of hostility against any Mohometan nation, it is declared by the parties, that no pretext arising from religious opinions, shall ever produce an interruption of the harmony existing between the two countries.

This treaty was read aloud to the Senate and unanimously approved.

Those who argue America was founded as a Christian nation are able to find evidence of a great deal of Christian religious fervor as early as about 1800, which was the approximate beginning of the Second Great Awakening. But the participants in that were a younger generation, motivated in substantial part by the horrors of the French Revolution and the suspicion that they arose precisely because of the secularization of France. Several of the Founding Fathers expressed their dismay at the religiosity of the Second Great Awakening.

In the lecture and QA, Stone deals with many related issues including the meaning of the First Amendment, the fact that 11 of 13 States had established religions at the time the Constitution was ratified, what citizens thought about Christianity and how that might affect the meaning of the First Amendment, etc. Stone seems to be aiming this scholarship at judicial "originalists" who try to interpret the Constitution by figuring out what the Drafters would have thought about an issue, if they had thought about it.

Tuesday
Jul152008

The imperial Bush presidency is too much for this conservative legal scholar.

"The Bush presidency seems determined to go out in a blaze of executive overreaching." That may not seem a profound insight, but it is noteworthy that it was written by Douglas Kmiec. Kmiec was head of the Office of Legal Counsel in the Justice Department during the Reagan and George H. W. Bush presidencies and is now a professor of constitutional law at Pepperdine. The function of the Office of Legal Counsel is to give legal advice to the presidency and is presumably the source of advice the current President Bush is getting about "executive privilege."

In the linked post, Kmiec provides a brief summary of the history of executive privilege and its underpinnings and limits, how the current Bush administration has distorted and abused the doctrine, and how it's clear that the doctrine does not justify White House refusals to let Karl Rove, Harriet Miers, Joshua Bolton and others testify before Congress about politicization of U.S. Attorneys' charging decisions and about torture policies.

Perhaps it's even bigger news that Kmiec has endorsed Barak Obama for President (and has been denied communion by one Catholic priest as a result).

Monday
Jul142008

The Onion nails it.  Twice.

Follow this link to a short Paul Krugman blog post in which he reminds us what The Onion predicted 7+ years ago about the Bush Administration and what The Onion says is coming now. 

Friday
Jul112008

Bernanke A, House committee members B, Paulson C-

Those are the grades I would give after watching an hour of Bernanke and Paulson testifying before Barney Frank's committee yesterday. Bernanke was articulate and clearly conversant with all of the details of the big issues on his plate and of the related issues on the plates of Treasury, the SEC, and other institutions. Paulson was neither articulate nor informed; all I heard from him was a blather of randomly-connected abstract buzz words. My grade gives him the benefit of the doubt. Given the general reputation of Congress for being clueless, I was pleasantly surprised that at least 80 percent of the members who commented and asked questions seemed to know what they were talking about and could even ask incisive follow-up questions.

Thursday
Jul102008

The Recession Is Coming! The Recession Is Coming! (Republished with corrected chart.)

Whether the US economy has slipped into "recession," or will in 2008, is discussed everyday in the media. Well, here is the real news: For the middle class, the working class, and the poor, the recession started 7 years ago. And, as the following graph of real median family income also shows, the Golden Age of middle class economic growth ended in the Nixon Administration. Do we care? Should we?

(NOTE: This was originally posted December 24, 2007.  I discovered that I had inadvertently included a chart of after-tax family income by quintile when I was discussing pre-tax incomes.  In making the correction, I inadvertently deleted the original version, an endnote, and an update, and republished the corrected body with today's date.) 

Real median US family income 1947 to 2005

The Golden Age.

During the Golden Age from 1949 through 1973, inflation-adjusted (i.e., "real") median family income soared at a compound annual rate of 3.19%, from $21,597 to $45,865. Despite the fact that there were recessions that seemed significant at the time, median income rose every year except 1954 (down 2.41%), 1958 (down 0.45%), and 1970-71 (down 0.4% after two years). By the Rule of 72, real median income doubled in less than 23 years. The expectation that each new generation of Americans would do better economically was a central part of the American Dream.

The Crude Oil Shocks, Stagflation, Morning in America, and the Internet Bubble.

The Golden Age ended with the crude oil price shocks of 1973 and 1979, rampant inflation, and the period of stagflation and deep recession that bridged the Carter and Reagan Administrations, bottoming out in 1982. During this period, real median family income fell and rose twice but in 1983 was still below where it had been in 1973.

During the Reagan and first Bush Administrations, the real median income increased from $45,382 in the 1982 nadir to $52,015 in 1989, a compound annual rate of 1.97%, well below what it was during the Golden Age despite the stimulus of massive deficit spending. Then it declined again for 4 years straight, bottoming out at $49,169 in 1993. Thus, in the 11 Reagan/Bush years from the 1982 low to the 1993 low, the annual compound growth rate was only 0.73%. Not much of a "Morning in America" for the median family.

Running for re-election on this record, Bush lost to Clinton, who emphasized, "It's the economy, stupid." Despite reducing, and finally eliminating, deficit spending, the internet bubble (or something) drove real median family income from $49,169 in 1993 to an all-time high of $57,508 in 2000, a compound annual rate of 2.26%. I.e., growth during this upward-only interval was only 71% as robust as the entire 24-year Golden Age. Averaging out all of the volatility in the 27 years between the end of the Golden Age (1973) and the all-time high in 2000, the compound annual growth rate was only 0.84%. At that rate incomes would double in 86 years. And then it got worse.

The Current Middle Class Recession.

Real median income declined every year for 4 straight years under George W. Bush to $55,869 in 2004 and recovered only 0.58% to $56,194 in 2005. I could not find family income statistics for 2006, but the Census Bureau reports that real incomes for the third quintile of households rose about 1.2% that year, still below the ranges for 2000 and 2001. It is very likely that 2008 will be below 2007 and that both will be below 2000, especially if we go into a technical "recession" (defined as two consecutive quarters of declining GDP). What is meaningful to a median income family, everybody below the median, and millions of families somewhat above the median is that their real incomes have been down for 7 years and there's no foreseeable end to their declining economic status.

The Bigger—and Even Bleaker—Picture.

If real median income recovers in 2008 to the 2000 level, the compound annual growth rate from 1973 to 2008 will have been 0.65%, for a doubling time of 111 years. Hardly the stuff American Dreams are made of. But on an hourly basis, middle class families have not gained at all; they fell behind. Since the Golden Age, middle class families have been working much longer hours in order to increase median income only slightly. For example, husbands and wives age 25-54 with children together worked 18.1% more hours in 2004 than they did in 1973. The State of Working America 2006/2007, Table 1-24. (About 89% of the additional hours were worked by wives, confirming what we know intuitively—many more families have two earners than was the case in 1973.) During the same period real median income rose only 12.6%. They are attempting to climb a down-escalator and losing altitude.

Forget about GDP and Start Tracking Family Incomes.

If we want to understand how middle class, working class, and poor families fare in the economy, we should stop obsessing about GDP. The incomes of 80% of American families, and especially the bottom 60%, are no longer closely tied to changes in GDP, especially when GDP increases.

Real US family income by quintile 1979 to 2003

Note that the average income (in 2003 dollars) of the top quintile soared from $150,000 in 1992 to about $210,000 in 2000 and then fell back some during the Bush recession. Other data show that it was really the top 5% of families, and especially the top 1%, whose income changes most closely tracked changes in GDP. Real incomes for the bottom 3 quintiles essentially flat-lined for the entire 24-year period covered by this graph, and the fortunes of the 4th quintile were not much better.

And so . . . ?

Implicit in this history are many difficult questions as to which the answers are debatable and are certainly not technically or politically easy. For example: Why did the Golden Age end, and why has the subsequent history been so grim? Which uncontrollable exogenous forces and/or which domestic policy changes made the difference? What have been the effects of the declines of unions, minimum wage stagnation, the recovery of Europe and Japan from WWII, changing trade patterns, increasing globalization, technology changes, productivity changes, the shift from one-wage-earner to two-wage-earner families, asset valuation bubbles, lagging education, immigration, government regulations, exploding prices in certain sectors such as energy and health care, etc.? Why do increases in GDP no longer get shared by the lower strata? What government policies could make the economy work better for them? Which of those policy options would not unreasonably impair the returns to capital? But there is no need to get into such questions unless there is an important problem that government should address.

Well, is there a problem? Is this good enough for America? Or should it be a national goal to get the middle class moving again?

Tuesday
Jul082008

Senator Jim Webb nails it.

Tavis Smiley interviewed Senator Jim Webb here (click on "full interview").  I don't think anybody has done a better job than Webb of expressing succinctly my view about how our government has sold out the American middle class and why that's a bad thing. 

Saturday
Jul052008

Nuke at Night

After hearing Newt Gingrich talk about energy policy, I've upgraded hydrogen powered vehicles from completely nuts to a bad idea that won't be implemented. Newt argues that if a high fraction of our electricity were being generated by nukes, they could generate hydrogen at night when grid demand for electricity is usually lower. Under those assumptions, hydrogen could be cheap and carbon neutral, and one could begin to imagine a hydrogen economy. But here are reasons the assumptions are inadequate.

Even if hydrogen is cheap when generated by a nuke at night because not charged with any of the nuke's capital costs, the savings could be entirely captured as profits to the nuke instead of being passed through as lower prices at the hydrogen refueling station. The retail price of hydrogen will tend to be floored by the costs of the highest-cost hydrogen producer, who may not be using spare capacity but absorbing a full share of capital costs into its hydrogen production costs.

For the nuclear power industry, the prospect of hydrogen is seductive because that could give a nuke a way to follow the grid load and make daytime and intermittent generation from other sources less important. But that prospect is dimmed if direct solar generation (from photovoltaics and/or concentrated solar thermal plants) is widely deployed. Under that scenario, nukes would supply electricity to the grid at a steady rate around the clock, and solar-electric plants would follow the incremental daytime load. Nukes would have less spare capacity—or perhaps no spare capacity—to generate hydrogen cheaply at night. (I tried, unsuccessfully, to find data about diurnal demand variations, which surely vary from place to place and season to season.)

To be the next dominant type of vehicle, hydrogen powered vehicles must out-compete battery powered vehicles, especially plug-in hybrids. If battery vehicles have enough range to serve as a family's primary vehicle, they will generally be recharged at home at night. This would tend to level the demand difference between day and night in the same way that making hydrogen at night would tend to level demand. In a previous post, I pointed out that battery powered cars and hydrogen fuel cell powered cars are competing technologies, both starting with grid electricity and ending with electric motors at the wheels, and that the processes in between give the advantage to batteries over fuel cells.

In summary, Newt's video provides the first explanation I have seen for why hydrogen could possibly be cheap and carbon neutral—it all depends on having a greatly expanded nuclear power industry and a continuing diurnal electricity demand profile. But a lot of other factors would have to go implausibly right also. Hydrogen vehicles are still a Will o' the wisp. Bet on plug-in hybrids instead.

Thanks to Peter for sending me the link to Newt's speech.

Friday
Jul042008

International crude oil markets don’t function like textbook markets and never have, and they don’t work like they did 15, 25, or 35 years ago either.

With high and increasing crude oil prices this year, everybody who comments on economics is weighing in on what he/she thinks are the causes and what should be done—or more often, what should not be done—about the situation. A large majority of commentators make the threshold error of assuming real-world crude oil markets work like the idealized models in their economics textbooks. They don't. Here is an excellent summary of how the methods of pricing OPEC crude oils at the producer level have changed several times over 40 years and how it really works today. Here's my summary of the summary.

In the mid-20th Century, international oil ownership and production was very much in the control of the Seven Sisters and a few smaller international oil companies like Occidental. In a foreign province, they obtained the concessions from the government, made the investments, owned the oil, determined how fast to pump it, set the prices, and simply paid a royalty to the host governments. Prices were administered entirely by the oil companies; they "posted" the selling prices and, very occasionally, changed them in their own discretion.

Then in the 1970s the big oil producing nations in rapid succession partially or totally nationalized their oil concessions and took over price administration. During this period, which lasted until the mid-1980s, the host governments set the prices and constrained production as necessary to enforce price discipline within the producers' cartel. But then demand plummeted, non-OPEC producers became significant, and there was so much excess capacity that discipline among producing nations could not be maintained. Companies that bought directly from the producing States refused to pay the posted prices, and started buying in the spot market or from non-OPEC members. OPEC's administered pricing system collapsed.

Saudi Arabia fought back by adopting a netback pricing system, where the price of the crude oil would be calculated from the selling prices of refined products by deducting a negotiated refining margin and transportation costs. Prices crashed from $26 to $10, and that ended netback pricing.

This was followed by a system of long-term contracts between OPEC members and their first purchasers in which the price of each shipment was set by reference to published reports of spot prices for marker crudes such as West Texas Intermediate and/or dated Brent (North Sea) crude oil. These reports were recognized as problematic for several reasons. Because actual sales of wet barrels in the reference markets were fairly infrequent, it was possible and useful for players to manipulate prices on critical dates. The reported prices were third-party estimates of prices based on surveys that were vulnerable to misrepresentations by the persons interviewed. Marker crudes were quite different from typical Middle East crudes in both quality and location. Marker crude production rates declined as Middle East crude production increased, making the tail smaller and the dog bigger.

To replace the unsatisfactory system based on reported spot prices, producing nations adopted the current system, which is to sell on long-term contracts with terms that price each shipment by reference to the crude oil futures market(s). The change was made because the futures markets seemed more transparent, larger and more liquid, and less susceptible to manipulation or misrepresentation than reported spot pricing. Long term contracts with this type of pricing provision are now the norm.

Today there are three distinct—but interrelated—crude oil markets: the primary long-term, reference-price contract market between OPEC members and first purchasers, spot markets for actual delivery of wet barrels, and the commodities futures markets for paper barrels. Probably a substantial number of transactions and prices in all three markets are never publicly disclosed. Thus, actual crude oil markets are not at all like the ideal markets assumed in textbooks and by most commentators on economics. The critical question, to which I have seen no convincing answer is how, to what extent, and under which circumstances each of these three markets—and the players in them—affect the other two markets.

Coda on blogging

The foregoing summary and most of my understanding about what's going on came from the blogosphere. Mainstream media reports were limited by space, reportorial understanding, and a bias for reporting controversies instead of information. In wonderful contrast, relevant parts of the blogosphere have experts arguing with one another in depth. Sure, the blogosphere contains vast quantities of wasted and erroneous words, but I have found several sites run by real and careful experts who elicit some very informed and insightful comments. Now I'd give up my subscription to the Los Angeles Times before I would stop following my favorite blogs.

Most of my improved understanding of oil prices came directly or indirectly from Paul Krugman's blog, where he started posting on oil prices in April 2008 and followed up with at least 6 more. At first, PK thought he would just explain to everybody that there is no speculative bubble because there is no physical hoarding. Full stop. He illustrated this with diagrams from a textbook. He got a storm of criticism, at least 10-20% of which was obviously well-informed, about practical realities of crude oil and/or futures markets. Some of the critics and supporters were obviously professional economists and some were recognized industry experts like Phil Verleger. Apparently, PK was also communicating with his peers off-line, and he linked to other blogs even when he didn't agree with them. I believe PK's own understanding changed considerably during these 10 weeks of dialog. Mine certainly did. It was a fascinating, collaborative, civil, intellectual process in which anybody could join.

PK's blog enriched me in another unexpected way. The citation to the report I summarized above was provided by JD, comment #35 to this Krugman post. [UPDATE 2/8/2011: The JD comment is now #16; apparently some comments were purged.] Before that, I had made a targeted online search for an explanation like this but could not find one and had given up. (JD provided other useful links too, as did other commenters.) Before I started regularly visiting selected blogs, I had assumed they would be useless as a source of basic facts and resources. I have found that the right blog can be a good tool for finding relevant and reliable information.

Friday
Jul042008

The world should follow Japan’s lead on greenhouse gas emissions control.

With the recent failure in the Senate of a cap-and-trade bill to reduce greenhouse gas emissions in the US, it's time to reconsider the basic regulatory approach. I have argued at length elsewhere (5th comment, by Roger Chittum) that the cap-and-trade methodology is too vulnerable to political manipulation and evasion and that technology-based emission limits on a plant by plant basis would be more saleable to developing countries. I am delighted to see in this NYT report that Japan has been going in this direction and will urge it on the G-8 next week.

At next week's summit meeting, Japan plans to back an initiative that could make its frugal energy levels the new standards for global industries.

Now, its government is pushing an initiative that could set Japan's levels of energy conservation as targets for global industries. Mr. Fukuda has proposed what is called a sector-based approach to new targets for reductions in greenhouse gas emissions. This means is [sic] setting the same numerical goals for all companies in an industry, regardless of location. The Kyoto Protocol set mandatory limits for industrialized countries.

The sector approach has been embraced by Japanese industry groups, which say their high levels of efficiency should become the global standards. This would also give Japanese companies more opportunities to sell their energy-saving technologies and skills around the world.

The Bush administration has focused on developing sector-by-sector partnerships with Japan and other countries to find ways to curb emissions, but remains opposed to mandatory limits.

A plant-by-plant or sector-based approach would require every new or modified plant to meet the emission limits that could be met by using the best control technology proven to have worked anywhere in the world, a standard that would continuously improve as technology advanced. This is how the Clean Air Act and the California analog work, and this scheme has been spectacularly successful in making California's air, and the nation's air, much cleaner now than it was 40 years ago, despite explosive population and transportation growth. In contrast, cap-and-trade has been failing in Europe.

In a triumph of Chicago School economic orthodoxy over what has been proven to work, Obama and McCain have both announced that they favor cap-and-trade regimes. 

Tuesday
Jul012008

What does "change" mean to Obama?

This Ezra Klein post commenting on David Brooks's dissection today of Obama's large donor support base contains a revealing quote from Obama's book, The Audacity of Hope and some interesting speculations about where Obama will try to go policy-wise.  One friend suggested to me recently, that the changes Obama most wants are to make political processes more liberal but that his preferred policies may be as Wall Street friendly as Bill Clinton's.  Seems plausible to me. 
Saturday
Jun212008

Top economist says the commodities bubble is fueled by low interest rates--not wet barrels shortage, the falling dollar, or "speculators."

Columbia economist Guillermo Calvo thinks the recent run-up in prices of crude oil and other commodities is caused by sovereign wealth funds fleeing cash and T-bills and rushing into commodities for higher returns. They are doing this, he says, because the Fed is keeping interest rates too low, and the result will be inflation. Paul Krugman, whose blog brought this to my attention, says he isn't persuaded, but that Calvo's explanation should be considered in a big debate that economists should be having to unravel the mystery. According to Krugman, "something awesome is happening to oil and other commodities, and figuring out what it means is crucial." I summarize their points and list all the factors I could think of that might be pushing up crude oil prices--because I'm pretty sure it isn't just one thing. 

Neither Calvo nor Krugman wants to blame "speculators" for the price rise. In Calvo's case that may be because he thinks the solution is for the Fed to start raising interest rates rather than to focus on operations in the commodities markets. But he does seem to agree with my basic point that the increased demand is for paper barrels, not wet barrels. Calvo seems to be saying that by raising interest rates the Fed can coax money out of commodities, but he doesn't seem to acknowledge the possibility that money might also flee commodities if a bear market were perceived. 

Krugman doesn't accept that there could be a price increase without a shortage of wet barrels--whether induced by hoarding or otherwise. I suggested here that there had been hoarding, but since then US crude oil inventories have been declining and are now only about 10% above minimum operational requirements. My summary of the speculation argument is here. The latter two posts have links to EIA and other data sources.

All of the following factors seem to have some influence on crude oil prices. By listing them all, I mean to exclude myself from all camps that argue for any single cause or explanation for crude oil price changes over the last year. The reason this is so hard to understand, I believe, is because there are multiple factors at work. 

Crude Oil Market Fundamentals

The fact (if it’s a fact) that available production capacity is just slightly more than demand and that the margin may shrink to zero in the next few months or years as demand grows rapidly in China and India. (So far there is zero evidence that there has been any physical shortage of wet barrels, but it is widely believed that a shortage is imminent, and beliefs about facts, not facts, make markets. The further belief is that if/when supply is maxed out, only price—and a pretty high price at that—will reduce demand to match available supply.)

The potential for supply disruptions caused by civil strife in Nigeria, hurricanes in the Gulf of Mexico, violence and lack of investment in Iraq, talk of war with Iran, etc., etc. (This is the so-called “risk premium.”)

The loss in value of the dollar versus other currencies—meaning that nominal oil prices have to rise if the same “real” selling price of crude oil is to be maintained.

Producing Nation Market Power

The ability of OPEC and especially the Saudis to administer prices within a broad range when, as now, all major producing nations are able to produce at or near capacity. (The Saudi oil minister said last week that any price above $70 is not justified by the supply/demand situation.)

The possible assessment by oil producing nations that the world can tolerate crude oil prices at or above $100 without “too much” demand destruction.

A possible shift in the thinking of producing nations, especially the Saudis, to favor slower rates of production in order to maximize oil revenues over a longer time period (even though the “net present value” of that strategy is probably lower, and even though the Saudis deny this speculation).

Possible changes in how producing nations, especially the Saudis, see oil prices and relative economic power in the region as affecting their geopolitical interests. (For example, in the Saudis’ view, is it better for Saudi Arabia to become even richer or for the current government of Iran to get into even more domestic political trouble as a result of declining oil revenues?)

The reduced geopolitical influence of the US. This would be due to the now obvious lack of US ability to impose its will on Middle East nations and to protect production and transportation of oil in the region, and due to a reduced sense of empathy and obligation toward the US.

Large Influxes of Capital into Commodities

A huge flood of capital into crude oil futures and options, as well as into commodities generally, both as a hedge against a decline in the value of the US dollar and as a bet on rising prices. When prices are rising investors want more, which further drives up prices.  Calvo describes this not as speculation but as seeking better returns than can be had in bank deposits and T-bills. 

Thursday
Jun192008

Inflation will be what we expect it to be.

Today I came across the citation for the 2006 Bank of Sweden (Nobel) prize in Economic Science awarded to Edmund Phelps. To my amazement, Phelps's prize-winning work is an exact expression of my unschooled, street-level explanation for why we had intractable "stagflation" in the 1970s and early 1980s and why we didn't later. Reading further, I learned that three different theories on what causes inflation have been successively the conventional wisdom since I studied economics in college. Listening to the current debate raging around me, I would guess that a lot of other people also missed these and other developments in economics since they graduated. Here, briefly, is how each of the first two theories was adopted, met with spectacular failure, and was replaced, and what the current theory (mine) holds.

In the early 1960s, there were two competing explanations for the causes of inflation and what the federal government could and should do to control it. The mainstream school typified by Paul Samuelson believed there was an unavoidable inverse relationship between the unemployment rate and the inflation rate and that government could manage the necessary tradeoff using Keynesian methods (monetary and fiscal policy). The insurgent monetarists led by Milton Friedman argued that inflation is always and everywhere a monetary phenomenon (i.e., dependent only on the quantity of money in circulation). Meanwhile, Edmund Phelps began to develop in the late 1960s the idea that actual inflation was caused solely by inflationary expectations of real people at street level and that the unemployment rate was almost totally independent of the inflation rate.

The Phillips Curve

In 1958, economist Alban Phillips published a paper describing his statistical finding of an inverse relationship between the inflation rate and unemployment rate in the United Kingdom in the 20th Century. Other economists including Paul Samuelson and Robert Solow took up this idea and developed it further. According to the theory, government could not accede to the demands of the owners of capital to hold down inflation without increasing unemployment and, conversely, successful efforts to stimulate employment would increase inflation. The idea was illustrated in textbooks with "Phillips curves." Details are here. The Keynesian legacy that was an important part of mainstream economics into the 1970s underpinned the conventional wisdom that the federal government should use fiscal and monetary policy to guide the economy along the Phillips curve and resolve the tension between capital and labor to attain a reasonable balance between inflation and unemployment while stimulating growth.

The Phillips curve and the whole Keynesian tradition suffered a crisis in the 1970s when the theory failed so spectacularly that it became indefensible. In the 1970s, the US had simultaneous and persistent high unemployment and high inflation, along with slow growth in real GDP. The Phillips curve did not admit this possibility and could not explain incontrovertible data from a very troubled current economy. From the beginning, a problem with the Phillips curve was that it is based on real world statistical analysis but lacked any persuasive theoretical explanation for why the unemployment and inflation rates should be so tightly linked. Its inability to explain the 1970s suggests that the Phillips curve was just a statistical fluke—a representation of coincidences that had occurred in the past and might not occur again.

Keynesian economics never recovered from this crisis because the way had been opened to try the ideas of the insurgents. Jimmy Carter appointed Paul Volker to head the Federal Reserve in 1979, and he immediately began to implement monetarist theory by tightening the money supply to ramp down inflation. Then Reagan was elected in 1980, and for the next 12 years the practitioners of Reaganomics, which included a large dose of monetarism, controlled the economic policy levers and gained prestige in the universities.

Only money matters.

Volker is widely credited with ending the stagflation crisis of the late 1970s by continually pushing up short-term interest rates in an effort to reduce the money supply. To many, he was and remains a hero, but the Fed's actions were so draconian and the economic carnage so vast that they scared many people, including reportedly Volker himself. Having focused for the first time solely on the money supply, the Fed belatedly discovered that the traditional measure of the money supply was misleading because additional money was being created outside the bank deposit system in the form of money markets and other devices. The Fed was trying to control growth in the "money supply," but it couldn't measure it reliably and certainly not in real time.

Anyway, as the Fed proceeded down this road, it raised short-term interest rates as high as 13.5% and the prime rate got to 20.5% in 1981. Eventually inflation was crushed, but so was economic growth and employment, leading in the early 1980s to the longest and deepest recession since the Great Depression. Although there are still monetarists who contend that "only money matters" and that the Fed should limit itself to managing the money supply, the much more widely held view now is that "money matters, but so do other things."

The inflation rate will be what we expect it to be.

With Keynesian/Phillips curve economics and monetarism both apparently unable to explain the real world and provide workable policy guidance, there was receptivity to the work of Phelps. Phelps approached his work by considering first how people make decisions at the firm level and how such decisions would tend to aggregate into a macroeconomic result. He concluded that actual inflation is determined solely by expectations about future inflation. In other words, if I expect I need to grant a 4% wage increase to cover expected inflation and to remain competitive in the labor market, and that I can raise prices 4%, I will take actions based on those expectations, so will everybody else, and the result will be 4% inflation. According to the Nobel Prize citation, this view is now widely accepted (although I would say that, like every other economic theory, it may well prove to be wrong).

That supports what I said in an email to Ben Stein and posted as An ounce of business experience is worth a pound of economic theory. Inflationary expectations in the 1970s were high and apparently irresistible, as perceived by me, but low in the 1990s largely because, I thought, Wal-Mart was everybody's largest and fastest growing customer and it refused to accept price increases. It may not be the key to the universe or even true, but I'm happy to have a Nobel laureate to cite in support of my epiphany. Regrettably for the mainstream economists of the last 50 years, they insist on expressing themselves only in mathematical models, and street level psychology and expectations may be pretty difficult to measure and load into a model. Regrettably for government officials, actually changing the inflation expectations of millions of individual actors is probably a lot more difficult than changing an interest rate.

Sunday
Jun152008

Allies against crony capitalism found in an unexpected place

I find much to agree with in this post on The Next Right, a blog dedicated to discussion of how the GOP can rescue itself doctrinally and win elections.  And it's not just because the post uses my favorite quotation from Adam Smith.  The point is that today politicians in both parties routinely choose conferring benefits on particular businesses over maintaining a healthy environment for competitive enterprise in general.  If government does nothing else with respect to enterprise, it must make and enforce sound rules of the game. 

Using the antitrust laws and agencies like the FCC to preserve and stimulate competition used to be taken seriously by both parties--expressly for the purpose of preserving a competitive playing field.  But since about 1981 there has been a growing, and now near total, capitulation to rent seeking and crony capitalism in the US.  The games are mostly played without referees.  The inmates are running the asylum.  The fox is guarding the chickens.  Fill in your own metaphor here. 

Friday
Jun132008

Rubinomics in crisis

The Democratic Party will likely be in control of the nation's economic policy levers in 7 months, and they don't know what to do. The best article I have seen about the intra-party debate, uncertainty, and confusion is this one by Jonathan Chait (which is the source of all the quotations below). Most striking to me is that the winners of the debate in the Clinton Administration, when the good times rolled, know that game plan won't work again and are far more confused than the losers of that intramural debate.

Oversimplifying a bit, there are two camps of political economists within the Party. Both are focused on the goal of fixing the stagnation in real pre-tax middle class incomes. One group, identified with the Democratic Leadership Council, Robert Rubin and the Hamilton Project, argued that Clinton should focus on growing the economic pie and that middle class income growth would come naturally. The other group, identified with Robert Reich, the American Prospect and the Economic Policy Institute, argued that the middle class had lost its power to negotiate for its share of a growing pie and needed government to reset the balance of power.

Rubinomics won the argument early in the Clinton Administration—with apparently good results—for 7 years the middle class enjoyed the largest real pre-tax income increases it had had since the 1960s. Graph here. But, according to Chait, the Rubinites' have been greatly surprised—and greatly troubled—as they have watched GDP grow under Bush but have seen all of the pre-tax gains going only to those on the top rung of the ladder. That didn't happen in the 1990s, and they can't figure out why it's happening under Bush policies that are not different in ways they think should affect pre-tax income distribution.

Rubinomics practitioners are publicly concerned about the effects of globalization. Alan Blinder has pointed out that tens of millions of US jobs could be outsourced and that that will tend to depress US wages.

A recent paper by the Hamilton Project, a Rubin-led group that is ground zero for former Clintonite economists, offered up a far more measured endorsement of free trade than would have been on display a dozen years ago, conceding, "International trade also has slightly exacerbated the underlying trend in the United States to a greater income inequality and increased levels of income volatility." Former Clinton economic advisor Gene Sperling wrote last year that his fellow moderates should admit that "accelerated market opening in nations with weak safety nets and poor labor rights can at least temporarily exacerbate inequity."

Even Rubin has talked about the "global convergence of wages." Translation:  Developing world wages rise, ours fall. 

Other Rubinomics theories are getting gobsmacked by data from the real world.  Labor productivity is increasing in the Bush years but for the first time in 100 years the gains are going entirely to capital.  Skills and education aren't delivering the expected benefits. 

Economists on the Left are not surprised by any of this--they predicted it.  Economists on the Right don't care.  The economists in the Rubinomics middle are struggling, more or less alone, to make sense of it so they can have recommendations they believe in for Obama. 

Thanks to Ezra Klein's blog for pointing me indirectly to the Chait article. 

Thursday
Jun122008

Fareed Zakaria's grim long-term vision of the US economy

Fareed Zakaria has this good short piece in the current Newsweek about the grim long-term outlook for the US economy, what he thinks we should do, and why we can't.  I agree with his view that it won't be enough just to get through this business cycle downturn.  We've been in a slowing trend for 35 years, and real median family incomes at the 2007 top of the last cycle were lower than they were at the 2000 top of the previous cycle.  Unless something changes, it looks like this is the decade in which American middle class progress reached its peak and started a long-term decline.  I don't endorse Zakaria's particular program, but his assessment of the politics that prevent useful action is depressingly accurate. 

Thursday
Jun122008

Why some Dems don't like "redistribution"

I mentioned here the concepts of "redistribution" and "predistribution" that are in tension within Democratic politics, as described by Matt Bai here.  This New York Times article is a good example of one reason why the predistributionists object to the redistribution concept--it's unreliable.  The House passed a bill to extend jobless benefits but Bush has threatened to veto it and there is not (yet?) a veto-proof majority in the House. 

Monday
Jun092008

Obama shows a little economic policy leg.

Paul Krugman has been telling us that Obama is to the right of Hillary Clinton on economic issues, but apparently he's not to the right of Bill Clinton.  Obama has just hired Jason Furman as Director of Economic Policy for the general election campaign.  Furman worked in the Clinton Whitehouse and was most recently Director of the Hamilton Project at Brookings.  Clinton's Treasury Secretary, Robert Rubin, is the main Hamilton Project driver.  Thanks to Politico for the news and background. 

Bill Clinton, Robert Rubin, and the Hamilton Project are all part of the "redistributionist" wing of the Democratic Party.  They are opposed by the "predistributionists," who would alter the playing field so that a bigger share of income goes initially to the middle class and doesn't have to be "redistributed" there.  For two long articles about these differences within the Party and what "Rubinomics" is, read Matt Bai here and Robert Kuttner here

Friday
Jun062008

Eating is worse for the planet than driving. (Update: No, it's not.)

The food eaten by a typical US household involves the creation of 8.1 tons per year of CO2-equivalent greenhouse gases, according to researchers at Carnegie Mellon University. [Link repaired 1/26/2011.] (Methane and nitrous oxide, which are also GHGs, are more important in the food chain than CO2 itself.) About 83 percent of the food-related GHGs are generated in the growing and harvesting of food, and about half of that is associated with red meat and dairy products. Only 11 percent of the GHGs are generated in transportation of food, with the 6-percent balance presumably associated with processing and packaging. In contrast, a typical automobile driven 12,000 miles per year at 25 MPG emits "only" 4.4 tons of CO2. I doubt the pending cap-and-trade legislation covers cows. Thanks to Ezra Klein's blog for this information. The graphic is from the CMU report.

Thursday
Jun052008

Evidence that Bernanke really is more highly evolved

Ben Bernanke wrote this in 1974 as a Harvard undergrad:

No matter how sophisticated the theory behind an estimated equation, the equation is always naïve. This is particularly problematical in the social sciences, when the basic unit of observation is so often that political, free-willed, unpredictable character, the individual human.

If all economists and politicians understood this, I would have a lot less to write about. My general view is that, to the contrary, they either believe their equations closely represent reality or that the equations represent a utopia to which reality must, and can, be conformed. My current view of Bernanke is that he is a pragmatic professional who still has in mind what he wrote 34 years ago, is not constrained by any ideological straight jacket, and won't follow any equation over a cliff. That's a pretty low bar to get over, but I'm satisfied.

The quotation and more about Bernanke's undergraduate years at Harvard are in this New York Times article today.  And the visual evidence of Bernanke's evolutionary status is here

Wednesday
Jun042008

3 errors in one New York Times sentence. Is that a record?

Today's New York Times contains this howler in an article by David Leonhardt.

"The only reliable way to cut oil use—to reduce the flow of money to Iran, Russia and Saudi Arabia, to reduce the odds that the planet just keeps getting hotter—is to make oil more expensive."

I offered the following comment online, but it was not posted. Too many facts? Embarrassing to a Times public policy choice? At last count 206 comments to the article had passed the Times' rigorous standards, whatever they are.

In this sentence "reduce" means "increase," right? As crude oil prices have doubled, the exporters have not reduced their output because any reduction in US demand is being offset by increased demand in China and India. So the flow of money to problematic producing nations has doubled since a year ago. If over time these price levels forced worldwide demand down, by say 20%, the flow of money to producing nations at current prices would still be 60 percent higher than it was a year ago.

High prices are not the "only" way to cut oil use. CAFE standards worked brilliantly in the past to limit highway fuel (and crude oil) consumption at times when real gasoline prices were at historic lows. Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) Standards, National Research Council (2002). http://www.nhtsa.dot.gov/CARS/rules/CAFE/docs/162944_web.pdf EPA's 2007 report is here. http://www.epa.gov/oms/cert/mpg/fetrends/420s07001.htm And the EIA chart on real gasoline prices is here. http://www.eia.doe.gov/emeu/steo/pub/fsheets/real_prices.html Building and appliance efficiency standards adopted in the 1970s and later were also very effective in limiting the growth of oil consumption in the US. This report by McKinsey & Co. shows the great potential for further efficiency gains that could be mandated and would pay for themselves. http://www.mckinsey.com/clientservice/ccsi/pdf/US_ghg_final_report.pdf

Expensive oil is not a "reliable" way to cut oil use. A lot of people think oil prices will stay high, but nobody knows. High oil prices affect the whole economy, not just vehicle purchase decisions and driving habits, and that can cause big swings in oil demand and prices.

So there are three errors in just one NYT sentence. Is that some kind of record?