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Jones/Rothschild: ARRA and Unemployment

August 31, 2011 Leave a comment

Here is the blogfather Tyler Cowen and here is Kevin Drum, both commenting on this paper by Garett Jones & Daniel Rothschild (and this paper as well). All are interesting and easy reads.

First of all, this is an excellent example of drawing two different conclusions from the same data. Cowen leans libertarian, hence his skepticism towards the stimulus, whereas Drum writes for Mother Jones, so he is more of an optimist.

Both guys have excellent points, and I guess the feelings you have about whether the stimulus “worked” or not have a lot to do with where you set the goal post. The way that the numbers sound to me, I have to say that I was a little underwhelmed (only 42% of the job offers created went to people who were unemployed, and it is ambiguous how much of the ARRA funds went towards payrolls instead of purchasing capital, retiring debt, or saving for a rainy day). Of the already employed people who found a new job thanks to ARRA, did the jobs they leave disappear, or did it lead to extra hiring to fill those spots (hiring that is not included in the analysis)?

I do not think that this is evidence against stimulus, but I do see it as evidence for smarter stimulus. I also see it as evidence for more stimulus, regardless of how smart it is. The stated intention of the stimulus was to save and create jobs. If only a fraction of the money spent did this, I say we should be more careful in how it is spent. Then again, the stimulus is working (however half-assedly), and this study should be enough evidence to shut up a lot of the Republican supply-siders who say stimulus is inherently useless (sadly, it will not be enough to shut them up).

This could just be my bias from reading Cowen’s blog, but I tend to think that structural changes within the US and the globalization of the labor market mean that higher unemployment is here to stay, given the current lack of any political solutions in the pipeline. If it is true that no jobs are truly shovel ready, and that labor market polarization has made obsolete or unnecessary the old jobs of the unemployed, is it worth it to reemploy these people using political measures (aka stimulus)? I don’t think that throwing money haphazardly at the private sector is the most efficient way to alleviate unemployment. How about a national strategy to address the foundational problems in our economy? The manufacturing jobs don’t seem to be coming back anytime soon, maybe we should start a trillion dollar project for clean, renewable energy, and train the unemployed for jobs in this sector of the economy. Not only does this help employment, it also gives us an energy policy that is more than just foreign policy, and I think that is the kind of investment that will generate high returns for decades to come.

Categories: Business, Economics

Dinosaur Economics vs. Actual Real Life

August 31, 2011 Leave a comment

Here is Robert Barro on Keynesian multipliers (or lack thereof).

Barro believes that there is no multiplier, that multipliers are a “free lunch” and therefore can’t exist in “regular economics”. Furthermore he states that there is “no theoretical or empirical support for the Keynesian position”.

I don’t entirely disagree with the first statement, but I do think that it is a mischaracterization to refer to multipliers as a “free lunch”. The second statement I just flat out disagree with, and it is a disagreement in substance rather than syntax.

The theoretical evidence for Keynesian position is everywhere. It is in Keynes’s General Theory, it is in the countless papers that have been published over the last 80 years by a myriad of economists, including some from Barro’s own department at Harvard. Empirical evidence of anything in macroeconomics is impossible to come by. It really depends on your definition of empirical. Literally, it means “from observation”, but the problem with the study of economics is that so-called “economists” can look at the same thing and arrive at two completely different “empirical” conclusions… i.e. stimulus doesn’t work because we still have unemployment vs. stimulus does work, we just didn’t do enough.

Macroconditions can get interpreted a number of different ways depending on the ideologies of the interpreter, and that is the fundamental problem with prescriptive economics. This isn’t a problem that is unique to social sciences: look at the current “debate” about global warming. It only takes a small handful of people or data points to challenge the “consensus”. Climate scientists have it easy; they are 90% in agreement. Within economics, there are hundreds, if not thousands, of different models. Each one gets tweaked and changed constantly. None of them predict economic trends with any degree of accuracy or consistency, NONE of them. They are almost all situational, describing what happens correctly the 1% of the time that the model and reality are in sync.

But all that aside, I called this post Dinosaur Economics vs. Actual Real Life because Barro and many of his colleagues at Harvard are ideologically biased towards economic ideas that should be extinct.

“In regular economics, the central ideas involve incentives as the drivers of economic activity. Additional transfers to people with earnings below designated levels motivate less work effort by reducing the reward from working.”

He calls it “regular economics” to normalize his own biases. What he means by “regular” economics is what could roughly be called neoclassical economics, the body of thought that goes back to Adam Smith and essentially ends with the Monetarism of Milton Friedman (actually it doesn’t really end there, but unfortunately economists have been unable to push any new paradigms into the sphere of public policy since then). Behavioral economics, the profession’s current best chance at redeeming itself, has a lot to say about what motivates people to do things in different situations. Incentives don’t work the way Barro would like them to; I can understand his desire, it makes economics very easy when we assume all actors are rational and have agency over their choices.

In addition, the financing of a transfer program requires more taxes—today or in the future in the case of deficit financing. These added levies likely further reduce work effort—in this instance by taxpayers expected to finance the transfer—and also lower investment because the return after taxes is diminished.

What Barro says here about taxes is wrong. There is very little evidence to show that people work less because of higher taxes. Most people work the same regardless of taxes. Some people might work more because of higher taxes, to maintain the same level of income. The effects are ambiguous. Certainly, millionaires and billionaires will be more likely to invest and build businesses in areas with lower taxes, but today’s tax rate is completely unhinged from today’s deficit. Deficits will have to theoretically be paid for eventually, but there is no correlation between budgeted deficits/surpluses and expected tax rates. The expectations are what is most important when it comes to investment decisions. A dearth of leadership from both sides of the aisle has created a situation where investors have no idea about what future tax policy will be like. The dimmer ones may be temporarily assured by the (relatively small) austerity measures in the latest budget, but Washington seems to be more preoccupied with petty political bickering instead of coming up with a plan (any plan) about economic strategy. In any case, weak austerity has been Washington’s half-assed signal to the markets that it takes the deficit seriously. The problem is that the markets see how weak Washington’s actual resolve is, and there is also the nagging fact that there is disagreement, even between the big wigs on Wall Street, of whether austerity is the best course of action.

But enough of that: my real critique of Barro is that his model is archaic and much too simple for him to feel as strongly as he does about his ideological footing. Sadly, the models he seems to use are the same ones that they have taught econ undergrads for the last 80 years. It is akin to Newtonian physics: certainly an excellent way aim a cannon or even put a man on the moon, but it goes to shit when we start talking about black holes or quantum mechanics. Barro’s folk economics makes sense when you are talking about household balance sheets or you are using a gross over-simplifaction to make a point about deadweight loss or crowding out, but in today’s world of globalization, floating exchange rates, and modern central banking, it is essentially worthless as anything but a pedagogical tool. Physics students do not learn Einstein’s original theory of relativity when they go to school, instead they get a more recent model that corrects Einstein’s errors. Economics is not like this. The theory being taught to today’s undergrads is old and outdated, proven to be wrong or incomplete… yet it still gets taught, I think because it is “easy”, the same way Newtonian physics is easier than quantum mechanics.

The point I am trying to make is that people like Barro are what is holding economics back as a science and profession. They are not scientists, they are ideologues. They don’t ask questions, they offer prepackaged explanations that match their ideological bias. This is why they defend their responses by referring to the “classics”, all of which have been written long ago by long dead authors. This is why they have to make unstated assumptions and baseless assertions (Barro’s piece is writhe with both, too many for me to find utility in highlighting). Part of this is laziness, part of it is political. Economics is big money, especially for a Hoover fellow/Harvard faculty guy like Barro. To get where he is, you have to cast your lot with the establishment, and they are more usually more interested in staying established than rocking the boat in the name of the truth (and nothing helps you stay established quite like low capital gains taxes or payroll tax ceilings).

There are two ways to view Keynesian stimulus through transfer programs. It’s either a divine miracle—where one gets back more than one puts in—or else it’s the macroeconomic equivalent of bloodletting. Obviously, I lean toward the latter position, but I am still hoping for more empirical evidence.

At least he is still holding out for more evidence, the hallmark of a true scientist. I guess there is hope after all.

I could be out of my league calling out Barro; he is a well known and respected economist and I am shit. But I can read the texts and analyze the data and do the math, and I can’t see how Barro’s meager piece for the WSJ is anything but a gross and misleading diatribe against something that he is personally uninterested in addressing responsibly. As an “expert”, he is doing a disservice to his fans, students, colleagues, and readership.

Categories: Economics

“The older I get, the more life starts to make sense, and the less I care.”

August 30, 2011 Leave a comment

I haven’t really felt like delving into politics lately (because I have nothing to say? it is pointless? disgusting?) but I guess I have some random thoughts about things that someone might find interesting.

Rick Perry: the American public has a tendency to attribute exogenously created success or failure to the “guidance” of executive “decision making”. Giving Perry credit for Texas job growth is like giving a witch doctor credit for making it rain. I am not saying that jobs were created in spite of Perry, just that the man knows nothing substantial about how to create jobs in a demand-constrained economy with excess production capacity. The republican mantra of “low taxes” is sound advice, like a doctor telling you to eat well and exercise, but it isn’t going to help you out once you’ve contracted the ebola virus; more dramatic action is needed.

Taxes and the Deficit: the media continues to repeatedly confuse the relationship between public debt, the fiscal deficit, and taxes. This has been my bugaboo for a while, but it still confounds me how often “the experts” seem to get it wrong. This relates to my other hypothesis/pet peeve, which is that 99% of elected officials know essentially nothing about the modern economy. I think this is probably a failure of the education system, and I am sure the problem extends to people who aren’t public officials. The gist of my point is that you can’t have an honest discussion about the economy without any real understanding of it. It would be like trying to put a man on Mars while maintaining that the sun rotates around the Earth.

Ben Bernanke: to Milton Friedman on Friedman’s 90th birthday: “Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.” Bernanke said this in 2002. Maybe he has forgotten? This weekend seemed to indicate that The Fed is unwilling to embrace its dual mandate of price stability and full employment. I can not imagine that the reason why is anything but political.

 

 

“The older I get, the more life starts to make sense, and the less I care.”

Categories: Economics, Politics

Criticism

August 28, 2011 Leave a comment

Does all cultural criticism suffer from a problem of perspective: today’s critic is yesterday’s crusader? Culture is by the people, and when those people get old, there are new people who begin to make their own mark upon that culture. So much criticism can essentially be boiled down to: “things aren’t the same anymore… it used to be like this, but now it is different, and the old way was kind of better.” Of course, I admit that it can cut both ways. I guess the new generation has its own critiques that indict the old ways and imply the inevitable supremacy of the new. It is the same liberal/conservative split that we see throughout society.

Is the critique always the underdog? Or is underdog status relational to the critique’s positioning (being “inside” or “outside” the norm) within society? What about in situations where there is no established mainstream, i.e. critiquing two parallel subcultures of equal following?

Is it conservative to critique religious fundamentalists because they are the “outsider” in todays culture (or are they not the outsiders)? Atheists? Unitarians? Mormons? Westboro Baptists? Is today’s mainstream society so socially liberal that modern social conservatives are actually a progressive insurgency for change?

It also seems to me that there is more criticism of the conservative variety than the liberal, i.e. more old people complaining about young people than vice versa. This could be a reflection of demographics (there are more young people), the liberalization of society, or maybe more so the complacency of today’s liberals with the social order (having nothing to really bitch about, or better things to do than bitch). How much do the bourgeois pleasures of the global neoliberal marketplace placate today’s young radicals? Do the youth of today care more about creation than critique, and if so, is this a phenomena that is unique to our time, constant throughout history, or cyclical?

Self-determinism has been a distinctly American value throughout the county’s history. From the babyboom generation onward, American’s have enjoyed the material wealth and associated privilege required to shape their world and future into whatever they may imagine. If this is a liberal attitude, the ability to create something new and actualize one’s dreams, it would seem that criticism would find little respite within the cadre of artists and visionaries that set the cultural agenda.

Categories: Art, Culture, Philosophy

Joseph Epstein on the American Novel

August 28, 2011 Leave a comment

Joseph Epstein reviewing “The Cambridge History of the American Novel” in the Wall Street Journal:

Only 40 or 50 years ago, English departments attracted men and women who wrote books of general intellectual interest and had names known outside the academy—Perry Miller, Aileen Ward, Walter Jackson Bate, Marjorie Hope Nicolson, Joseph Wood Krutch, Lionel Trilling, one could name a dozen or so others—but no longer.

I’m not familiar with any of those names, which of course speaks more of me than Epstein. Perhaps I am a victim of the academic evisceration and pedagogical over-extension that Epstein describes.

With the gates once carefully guarded by the centurions of high culture now flung open, the barbarians flooded in, and it is they who are running the joint today. The most lauded novelists in “The Cambridge History of the American Novel” tend to be those, in the words of another of its contributors, who are “staging a critique of ‘America’ and its imperial project.” Thus such secondary writers as Allen Ginsberg, Kurt Vonnegut and E.L. Doctorow are in these pages vaunted well beyond their literary worth.

Bring on the barbarians, I say. Ginsberg and Vonnegut were among the authors that spoke to me in high school and made me interested in books. To somehow deride them because of their politics is to miss the point: art is a reflection of the people and times that create it. I am sure that My Antonia and The Great Gatsby spoke to Epstein because they addressed the world of his time. The lessons in its pages had already been lived, digested, absorbed, and processed by the society that I was born into, a society whose young people became interested in a different set of questions and ideas than the ones puzzled over by Epstein and my grandparents. The commodification of the American Dream is merely hinted at in Gatsby, but it is at the forefront of everything that has been written since Ginsberg, et. al.

Epstein’s assessment of the modern English department is correct, but the correlation between the practices he maligns and the declining enrollment rates in American English departments lends no proof to any chain of causation, one way or the other. Book lovers still find their way into English departments, and they also find there way into Econ departments as necessitated by the realities of our changing society. The collected popular memes of postmodernism do not lend themselves very well to the type of canonical English department that Epstein reminisces over, the type where art’s meaning is conceived only within the mind of the artist and the audience’s role is to find this “correct” meaning rather than bring their own experiences into the process.

“The Cambridge History of the American Novel” could only have come into the world after the death of the once-crucial distinction between high and low culture, a distinction that, until 40 or so years ago, dominated the criticism of literature and all the other arts. Under the rule of this distinction, critics felt it their job to close the gates on inferior artistic products. The distinction started to break down once the works of contemporary authors began to be taught in universities.

Sadly, this is the case. When did popular culture and consumer culture become synonymous? Epstein’s “40 years ago” sounds about right, but has consumerism so permeated our society that all cultural output is now corrupted by it, and made unworthy of comparison to what came before? Unable to be compared, perhaps, but certainly not unworthy.

I do sympathize with Epstein here, because culture has become commercialized and it is something that is discomforting. But the quality that Epstein pines for is a subjective value, and within the current paradigm of postmodern thought that dominates today’s youth culture, subjectivity is inauthentic, a type of “anti-quality”. Within the current commercial structure of the cultural world, today’s more enlightened and informed consumers have not felt intellectually hamstrung by their enjoyment and relation with commercial art. Instead they embrace the diversity of choice that commercial art engenders, while simultaneously being aware of the subversive influence that capitalism has upon it (an influence that permeates every facet of society, of which there is no escaping, and of which Epstein’s generation [and perhaps several after it] was not viscerally aware in the same way that today’s youth are).

What I’ve Been Wrapping My Mind Around

August 26, 2011 1 comment

Neo-Chartalism, or Modern Monetary Theory

For the uninitiated, the best primer I can find is here.

I love economics because a 90 year old theory can suddenly become “new” and “hip”. Dismal science indeed.

Essentially, MMT is the ramification of the abandonment of the gold standard. It studies the issuance of fiat currency with floating exchange rates (meaning the market sets the exchange rate, rather than the government… i.e. the Euro floats, the Renminbi does not).

Wikipedia:

Because the government can issue its own currency at will, MMT maintains that the level of taxation relative to government spending is in reality a policy tool that regulates inflation and unemployment, and not a means of funding the government’s activities per se.

On the surface, this might seem to go against all common sense and imply that running federal budget deficits doesn’t matter, but that is not the case. MMT merely implies that a government that issues its own currency cannot go bankrupt in the same sense that individuals or firms go bankrupt because it can print as much money as it needs to pay that debt. So while not constrained by debt or interest rates, governments are constrained by the specter of hyperinflation. Once a currency becomes hyperinflated, the government that is issuing the currency loses legitimacy and the business community will install a new government. The acknowledgement of the role of the business community in legitimizing government makes MMT (or rather, the Functional Finance Theory that is derived from MMT) all the more interesting to me.

From the aforementioned primer:

Functional Finance is an economic theory based on the following principles:

  • The government is an entity created by the people and for the people. It exists to further the prosperity of the private sector – NOT to benefit at its expense. If this entity is allowed to exist for its own benefit or becomes corrupted by a concentration of power, it will become susceptible to dissolution via the populace’s rejection of that government.
  • Governments should be actively involved in regulating and helping build the infrastructure within which the private sector can generate economic growth. The economy is a complex dynamical system with irrational participants. It cannot be expected to regulate itself or behave rationally at all times. Therefore, some level of government intervention and involvement is not only beneficial, but necessary. But ultimately, it must be the private sector that is the driver of economic growth. While government can aid in this process it cannot be expected to be the primary driver of innovation, productivity and growth.
  • Money is always created by the state and must therefore be regulated by the state; however, ultimately the private sector must accept this legal tender as the currency unit. Therefore, the private and public sectors should best be thought of as being in partnership with one another and not opposing forces. Government by the people and for the people is not the antagonist in this story, but rather an entity that should be best utilized to maximize private sector prosperity.
  • Government deficit spending and tax collection should be maintained at a rate that does not impose financial hardship on the private sector. Because the Federal government is not a state or household it should not manage its balance sheet for its own benefit. Rather, taxes and government spending should be managed in a way that most benefits the private sector and encourages private sector prosperity, productivity, innovation and growth.
I haven’t been this excited by monetary economics since I first discovered the Austrian school in 2008. For the last week or so I’ve been combing through the blogs of L. Randall Wray and Warren Mosler. I know that a lot of my economic ideology is schizophrenic, but MMT seems to bring it all together for me.
Categories: Economics, Money

Ruben Navarrette, Jr. is a Geezer

August 5, 2011 Leave a comment

I feel like I am doing this guy a huge favor by linking to this diatribe against the entire so-called “millennial” generation. Basically, it is the same “Kids today have no respect” garbage that has been the hallmark theme of inter-generational relations since forever. The tl;dr summary version of his article is just the typical establishment line of “get back to work, stop asking questions and demanding answers”.

Ruben Navarrette, Jr. is jealous. He is jealous that employers are trying to make their positions more appealing to young people.

It’s called social change, it’s been happening for a while. I can imagine a 19th century version of Navarrette, decrying the new 8 hour work day, or the end of child labor.

Employers want to recruit young people because they have to, because young people are the future. It really is as simple as that. Employers don’t want to, they NEED to figure us out, otherwise someone else will. They will employ us and make a lot of money and put the old businesses out of business.

Young workers have bargaining power; we can live with mom and dad longer, we do know what work/life balance means, we don’t want to do the same thing most of our parents did. So yeah, corporate America, you have some selling to do if you want us to jump on your bandwagon, especially the best and brightest of us. Why would we go to work for your stodgy institutions when we can build new ones for ourselves, ones that are responsive to our needs? Think I am being idealistic? Look at the biggest tech companies in Silicon Valley, look at the average age of their executives and rank-and-file, look at the kind of perks they offer their employees.

Whom Navarrette is mainly referring to are the kids who aren’t the best and brightest, who are holding out for the cool job instead of working at McDonalds, who may never get that cool job, and subsequently will never be employable because of the long gap in their experience. I think this entire idea of the “perpetually unemployed because I never started that entry level job in a field I didn’t like” is bullshit. Successful companies and innovators find ways to harness that potential; that is why they are successful and innovative. 20% youth unemployment for 5-10 years is human capital begging to be put to use. Part of Navarrette’s prejudice is that he is used to the old world paradigm of a homogeneous human capital stock, where there are “jobs” and people go and “do them”. What is happening right now in the world economy is a huge reconfiguration of what those “jobs” are; many have moved or disappeared, but many more will be imagined and created, especially in an economy as dynamic as the United States. We are still the world’s leading innovator and still have the most liquid financial capital market in the world, with competitively relaxed capital controls and a surplus of people with “educations”.

Some people still don’t understand the new paradigms. They are still living in a world of 7% year-over-year GDP growth. They are still primarily motivated by dead ideas about material accumulation and social status. They still think that our society is a meritocracy, and they still believe in the benevolence of the US government and the integrity of our democracy.

You see, Mr. Navarrette, we are more educated and tech savvy than you. We did hear about your generation’s mixed success at social revolution, and we also saw how you abandoned your principles and let “Greed is good” replace “Flower power” as your slogan. We saw how you got old and fat, and marginalized the social malcontents by calling their (your) revolution “failed” and acting ashamed of your own personal “youthful transgressions”.

“But hold on,” you say, “I WASN’T one of them. I wasn’t a dirty hippie pothead, I was a Goldwater Republican…” or “I was a Vietnam veteran turned successful small business owner, not one of those burnouts…”

Okay, maybe you weren’t one of them Mr. Navarrette. Maybe it’s completely unfair and unrealistic to judge people based solely on their birth date. Maybe stereotyping an entire age cohort is a little irresponsible, a little prejudiced…

Maybe…

But the fact still remains that “we” (all of us, I am speaking about anyone under 30 because I know, I am under 30 after all) don’t want to be like you. I know it is not the thanks you wanted, but thanks for showing us how not to do it. Thanks for showing me that a moderately “successful” nationally syndicated columnist, who probably has a 5 bedroom house in the North County suburbs of San Diego with a pair of late model cars parked in the garage, can still have a stick up his ass and be not only out-of-touch, but resentful.