Pig Philosophy

On Structural vs Cyclical Unemployment.

2012-02-11T22:50:00.001-05:00

I am extremely reluctant to link to this news story from PBS Newshour. I do not like to post material for class that I'm not thrilled with since I do not like to write lengthy explanations of the material. However, I am trying to do two things in this semester. First, I want to use more video/news in class to illustrate examples. This was a request made last semester in the course evaluations and I think it makes a certain amount of sense. Second, I am trying to make more current event material available in general because 1. It justifies my lectures and 2. I think it's useful in helping you learn the material. Structural vs cyclical unemployment isn't the kind of story to show up very often in an accessible format, so I am stuck with what I have been given.

Anyway, this video comes by way of Mike Konzcal's excellent blog: Rortybomb:

Watch Can America's Jobless Fill American Jobs? on PBS. See more from PBS NewsHour.

Okay, so, I feel like a major problem with this piece is that it clearly has made up it's mind that the unemployment problem is structural. I can see why. The structural story lends itself to TV journalism nicely. They can go to a couple of locations, interview a couple of managers or owners complaining about the lack of qualified workers and call it a day. But it's important to bear in mind that they are presenting mostly anecdotal evidence. Konzcal, who appears in the story, doesn't get a lot of screen time but he does pose an important counter to the structural story. As he points out, for the structural story to make sense, you would expect to see unfilled job openings and wages increase. Neither of which shows up in the aggregate data.

As i said in class I am agnostic on the structural vs cyclical unemployment debate, though I find a lot more to disagree with in the structural position than with arguments for cyclical unemployment. For instance, the structural story is often told about construction and manufacturing. However, I feel that if you want to talk about low skilled labor you also have to talk about retail and food service and other sectors that have been on the rise and are also sectors that employ a lot of low skilled workers. So, lets look at a broader measure of unskilled workers. Here is a chart that shows the cumulative change from 1980-2012 in employment across four low skill sectors: leisure and hospitality, retail, manufacturing and construction.

I should point out that this is a very rough estimate of the impact of employment changes for "low skill" workers. Not everyone who works in these industries can be called low skilled. Anyway, another way to make the point the graph is making is to point out that since 1980 hospitality and retail have added around 11.2 million jobs while manufacturing and construction have lost only 6.4 million jobs. That total, since its from last month (Jan 2012) is actually kind of distorted since all four sectors have been shedding jobs since the recession. Before the recession (roughly), from Jan 1980 to Jan 2008 10 million "low skill" jobs had been added. For the structural story to stick then, you have to to assume we have "reverted to trend" and that around 5 million jobs were not "real" jobs.

Anyway, the point is, in order to tell the story of structural unemployment for low skill workers you have to be able to incorporate the increase in employment in other low skill sectors that are growing. I have not seen a lot of arguments for structural unemployment that have actually looked at the long run trend in different jobs of different skill level. So, lets compare job growth in these "low skill" sectors with job growth in "high skill sectors". Our proxy for high skill will be professional and business services and education and health services.

Here we see much more growth in "high skill" jobs than in "low skill" jobs. Another way to put this is that total nonfarm employment has grown by 135% since 1980. In the high skill industries in the above graph employment grew 85% and in the low skill industries employment only grew by 12% (in 2008 it had grown by 23%). I want to point out that nothing about that graph suggests that the collapse in jobs created for unskilled workers is structural. It could very easily be due to the fact that housing is going through a cyclical downturn while the rest of the low skilled service industry is experiencing the same stagnation you see even in the high skilled industries. This is easily attributable to normal business cycle dynamics.

However, if you wanted to read that graph as a story of structural unemployment then you can tell the story of how the growth of "skilled" employment has slowed down since the salad days of the 1990s but it continues to grow and has recovered more or less to its trend. Unskilled labor, however, seems to actually have been on a slight downward trend since its less spectacular 1990s. Here we can tell a story of the housing boom (and I guess even the tech boom) "artificially" propping up unskilled employment which has now reverted to its pre-1990 level where it "should" be. Of course, then you have to argue convincingly the definitions of the words in scare quotes.

Anyway, the cyclical vs structural debate tends to run along liberal vs conservative lines. Conservatives tend to want to frame this as a structural employment problem so they have a reason to throw up their hands and say "nothing can be done" from a public policy perspective. Roughly speaking, that seems to be the takeaway of the news report above. However, if the unemployment issue is all about skill levels the ONLY response is a public policy response since the vast majority of the educational system is publicly run. On top of which, the expansion of education would provide more jobs now for all skill levels. We would need to hire low skilled workers to build the buildings to house the high skilled workers who should be training workers for the skills they need for a 21st century economy.

Links about the Mankiw Walkout

2012-02-11T15:33:00.000-05:00

I've brought the Mankiw walkout a number of times in class. Here, for those of you that are interested, are some links explaining what went on and why it's been on my mind so much. It is important to point out as Steve Marglin does (below) that this isn't about Mankiw's class per se, but about the way econ gets taught. Mankiw is just a good poster child for the problems with traditional teaching of economics becuase his textbook(s) are "industry standard".

Here is a quick NPR news story about the walkout.

Here is the Harvard College newspaper article mentioned in the NPR story.

This is one of the better soul searching articles by the co-author of another best selling econ textbook, Robin Wells. I use her textbook in my Econ101 class.

Here is Mankiws op-ed reply to the walk out. I don't think it's that great of a reply and its a little self serving.

Here is a good summary of/reply to the Mankiw op-ed.

Finally, here is a video of a half hour lecture by Steve Marglin. Some of the walkout was driven by the fact that students were not given the option to take Marglin's more holistic course.

Velocity of M2

2012-02-05T08:42:00.002-05:00

Some Links About Apple.

2012-02-04T12:24:00.002-05:00

Here are a couple of links about Apple and China.

Here is the article I brought up in class about where the value added to the iPod comes from along the globalized production chain: An iPod Has Global Value. Ask the (Many) Countries That Make It. The article breaks down what parts of the iPod get made where. While I was trying to find the Times article I came across this article by Yuquig Xing. The article talks a lot about the same things, but its a little more technical. Anyway, there is this really interesting part:

The gross profit margin of the iPhone was 62% when the phone was launched in 2007, then rose to 64% in 2009 due to reductions in manufacturing costs (table 3). If the market were perfectly competitive, the expected profit margin would be much lower and close to its marginal cost. The surging sales and high profit margin suggest that the intensity of competition is fairly low and Apple maintains a relative monopoly position. Therefore, it is not the competition but profit maximisation that drives the iPhone’ s assembly to China.

An interesting hypothetical scenario is one where Apple had all iPhones assembled in the US. Assuming that the wage of American workers is ten times as high as those of their Chinese counterparts, the total assembly cost would rise to $68 and total manufacturing cost would be pushed to approximately $240. Selling iPhones assembled by American workers at $500 per unit would still leave a 50% profit margin for Apple. In this hypothetical scenario, the iPhone could contribute to US exports and reduce the US trade deficit, not only with China, but also with the rest of world. More importantly, Apple would create jobs for US low-skilled workers.

Xing then does that thing that all economists do when confronted with evidence that the "market" is not working which is to reflexively say that the government should not get involved but that Apple should take it upon itself to do better. Anyway, read the whole article, there is also a good section on how pointless it is to try to get China to increase the value of its currency.

Anyway, I remain agnostic on whether the iPhone should be made in the US or in China but the articledoes point to the fundamental critique pushed by Mike Daisy (more on him below) that there is essentially "no reason" (besides supernormal profits) why workers in China could not be paid more (ten times more!) or at the very least there could not be some fraction of that spent on making sure Foxconn plants don't occasionally explode.

There is another, more subtle issue here. Do Apple's supernormal profits come from not only maintaining it's monopoly position on the consumer end but also by putting the squeeze on Foxconn (as an important customer) to produce at extremely low costs. Here the fact that this is not just an Apple problem but that Foxconn makes electronics for a wide variety of electronics manufactures comes into play. Even if Apple were to insist on slightly lower profit margins (slightly higher prices) to raise living standards for workers one would expect a fair amount of push back from electronic manufacturers producing products in more competitive markets. These firms simply cannot afford to have costs of production increased (in theory, at least). In this way making this issue all about Apple is not useful.

Okay, last but definitely not least, here is a link to the Mike Daisey 'This American Life" episode (also, appropriately available on iTunes) that got everyone talking about this issue in the first place. I'm putting this last because it will be more relevant later in the semester when we turn to discussing development and long term growth. As I said in class, we will be looking at these issues from 35,000 feet. This podcast, better than anything else I can think of, is an important reminder that economies are made up of people. It also pushes people to not accept the process of development as necessarily brutal. Daisey's insistence that the invisible hand does not absolve us of our responsibilities as people is an important message that goes beyond just thinking about the crap we buy.

Econ 206: Macroeconomic Analysis. Sunday, Fall 2011. 9:20-12:00.

2012-01-22T11:34:00.012-05:00

The material posted here is for:

Econ 206: Macroeconomic Anaylsis
Spring 2012
Sunday 9:20 - 12:00
Room Science B145

As you probably noticed there is a direct link to this post on the right hand side of the blog.

I can be reached at: andrew.a.bossie@gmail.com

Office Hours: Sunday: 8:00am to 9:00am and 12:00pm to 1:00pm

If I am not in the classroom (SC-B145) I will be in the adjunct office in the economics department: PH300B. I will also usually be available after class.

*NOTE* The classroom has changed from SC-B145 to SC-B141 next door.

Syllabus

Class Material:

1. GDP and Employment

2. Inflation and Inequality

Texts:

1. Some Links about Apple
2. Structural vs Cyclical Unemployment
3. The Mankiw Walkout (Occupy Economics) and Teaching Econ.

Homework Assignments:

(Posted Monday Feb 13) Do to a lack of good material for a homework assignment I have decided to postpone the homework assignment until next week.

Econ 215: Money and Banking. Sunday, Fall 2011; Sunday 1:00 - 3:40.

2012-01-22T11:23:00.005-05:00

The material posted here is for:

Econ 215: Money and Banking
Spring 2012
Sunday 1:00 - 3:40.

Room PH155

As you probably noticed there is a direct link to this post on the right hand side of the blog.

I can be reached at: andrew.a.bossie@gmail.com

Office Hours: Sunday: 8:00am to 9:00am and 12:00pm to 1:00pm

If I am not in the classroom (PH155) I will be in the adjunct office in the economics department: PH300B. I will also usually be available after class.

Syllabus

Texts

David Graeber on the origins of money
Facebook's IPO and the Average Investor (NPR podcast) -Reinforces my explanation of what an IPO/underwriting is.

Freakonomics and the Economics of Crack Links.

2011-12-08T07:44:00.000-05:00

So, I mentioned the problems with Levitt & Donahue's (2001) argument that abortion lowered crime.

Here is Ted Joyce, a professor at Baruch (and the CUNY Graduate Center) on the Leonard Lopate show out his argument for why the study is flawed.

Also the Wikipedia article on the topic has summaries of several different arguments for why the study is problematic.

Anyway, the most interesting thing about the original Freakonomics book was the chapter on the economics of selling crack. The basic conclusion was that everybody gets paid really badly including the higher ups who make around $100,000 a year. A decent living, but not great considering the risks taken on to earn them.

Anyway, I had a hard time with The Wire because I didn't believe that the heads of the gangs were rich enough to be big time real estate developers. However, here is another podcast that's an interview with a once big time drug dealer about the economics of selling drugs and he is very clear that he made a lot of money.

The Child Protection Act of 1966

2011-12-06T07:45:00.004-05:00

Job killing regulation.

http://www.nbc.com/saturday-night-live/video/irwin-mainway/1185611

Rally Today at Baruch 4:00

2011-11-28T10:25:00.000-05:00

Protest at Baruch Monday Nov 28th 4:00pm Against $1500 Tuition Hikes.

2011-11-27T14:41:00.001-05:00

CUNY Students Rally for Education and Against Anti-Democratic Lock-Down
November 27, 2011

Contact: Dominique Nisperos (510) 788-0085, Elizabeth Sibilia (347) 249-2326
New York, NY– In a defensive move, City University New York’s (CUNY) Baruch
College President Mitchel Wallerstein announced yesterday his decision to
cancel all classes beginning after 3:00 p.m. on Monday, November 28th at
the school’s Newman Vertical Campus. The lock-down coincides with the 4:30
p.m. convening of the CUNY Board of Trustees, to finalize contentious votes
on across-the-board $1,500 tuition increase and the allocation of up to $15
million to expand security inside CUNY schools.

The campus lock-down is planned even though CUNY’s own legal department
shows that the meeting falls under New York State Open Meeting Law and is
legally required to be open to the public, including any CUNY students who
wish to attend as long as the room is at legal capacity.
“This desperate and unethical move by the Board of Trustees and Baruch
officials represents a victory for students and the public” explains Priya
Chandrasekaran, a doctoral student in Anthropology at The CUNY Graduate
Center who also teaches at Hunter College. “They've gone to such great
lengths to shut us out on the 28th because they finally get that we have
the power of numbers, righteousness, and ideas on our side.”
Chandrasekaran like many students and faculty opposing the fees see the
cancellations as a further example of the misdirected priorities of the
system’s administration rather than what Wallerstein asserts is necessary
to “ensure the safety of all students, faculty and staff during the period
surrounding the meeting.”

A week prior to the scheduled meeting, hundreds of CUNY students were
denied access to a purportedly public hearing at their own university. A
peaceful attempt to hold an alternative hearing and sit-in in the
building’s lobby was met with CUNY security officers wielding batons to
jab, shove, and hit students and faculty. Despite administrative claims
otherwise, video evidence documents that CUNY Officers initiated an
unprovoked attack on students and the presence of New York Police
Department Officers within the school. 15 students were arrested, several
injured, and five held in jail overnight in New York’s central booking.
University faculty view these acts as attempts to silence the growing
dissent at CUNY and have responded to the brutality with a student
solidarity campaign, collecting more than 2,000 signatures petitioning for
the resignation of Chancellor Matthew Goldstein--who also doubles as a
Trustee of the JP Morgan Funds.

"I'm proud to teach at a university where students take their education so
seriously that they are willing to protest to defend it, even when faced
with brutal police violence,” says Anthony Alessandrini, Associate
Professor of English at Kingsborough Community College. “The violent
attacks on student protesters at CUNY and other universities is an attack
not only upon their right to express their views, but an attack upon their
fundamental human right to pursue their education.”
A coalition of students from across CUNY’s campuses has organized students,
staff, faculty, community and union members for A People's Assembly to
Defend Education, a rally for increased access to public education,
democratic decision-making, and against policing and police brutality. The
event will convene on Monday, November 28, at 4:00 p.m. Outside of Baruch
College’s 25th Street Vertical Campus building.

###
Follow @OccupyCUNYGC on Twitter

The Growth Rate of Bachelor's Degrees.

2011-11-21T10:27:00.002-05:00

Claudia Goldin and Lawrence Katz made an important point a couple of years ago about how the growth rate of people getting bachelor's degrees is slowing down.

Anyway, I have a cruder measure of this phenomenon than they do. I just took the raw/simple measure of BA attainment from CPS data. The Table below measures the rate of growth of people with "4 or more years" of college education. The two numbers are just two different ways to calculate "average annual growth rates" because the data isn't there for all the years in the series.

2000 2010	2.93%
	2.88%

1980-2000	3.58%
	3.79%

1960-1980	5.49%
1965-1980	5.56%

1940-1960	2.75%

Texts on the Financial Crisis.

2011-11-20T21:40:00.000-05:00

I don't know why its taken me until now to just centralize this in one blog post.

This American Life Episode #355: “The Giant Pool of Money” (iTunes: 99cents 1 hour)

Matt Taibbi: The Great American Bubble Machine

Inside Job: On Netflix. I have not found any place to watch this for free.

Gary Gorton on the Financial Crisis

Charles Calomiris on the Financial Crisis
The above link is a direct link to the October 29, 2009 EconTalk podcast. You can play the podcast directly from the site or download it. If you prefer, you can also subscribe to the podcast through the ITunes Store.

Median Income in the 5 Boroughs.

2011-11-20T21:35:00.001-05:00

So, it turns out that Wikipedia has already covered this. It isn't clear, but I believe these numbers are from the 2010 census. I was wrong about Queen's median income:

Area	Median House- hold Income	Mean House- hold Income	Percent- age in Poverty
Bronx	$34,156	$46,298	27.1%
Brooklyn	$41,406	$60,020	21.9%
Manhattan	$64,217	$121,549	17.6%
New York City	$48,631	$75,809	18.5%
New York State	$53,514	$77,865	13.7%
Queens	$53,171	$67,027	12.0%
Staten Island	$66,985	$81,498	9.8%
United States	$50,140	$69,193	13.0%

I highly suggest reading the whole income section from this Wikipieda page.

Three Videos About The Rise of the Subdivision

2011-11-09T10:39:00.004-05:00

In some ways I think the videos below are better than the readings in giving you a sense of what it is like to build and live in post-war suburbia:

I'm not sure if this is professionally produced but the video below gives you a sense of the relatively quick evolution of the subdivision from Levittown, NY to Levittown, PA. Most usefully the video lists the six kinds of houses available in PA in contrast with the two available in the first NY project:

The next video is a series of industrial videos. I like it because it focuses on construction. I don't think people think a lot about technological advances in home building but it's important to remember that there was a lot of what you can call R&D that went into both the process of building and the materials used. Of course, the irony of asbestos shingles as the wave of the future isn't going to escape anyone. Anyway, if you don't watch the whole thing watch the last minute of the video it is a really fascinating time lapse of the construction of a house in a single day:

Finally, here is a video in two parts produced by Redbook magazine in 1957. It's another industrial video and this one is clearly targeted at advertisers. This is a really important video to watch for a couple of reasons. The anthropological tone on the video is fascinating and while it's useful as a historical document about the demographic being described it also gives you a clear picture of how sophisticated advertising had become by this point. Again, think of this as a kind of "technology" that is developing (and continues to develop) driven by the sciences of psychology, sociology etc.

Part1

Part 2

Fannie and Freddie's share of mortgages.

2011-11-03T08:40:00.001-04:00

From The Center for Community Capital.

Tom Ferguson Paper I keep not being able to find.

2011-10-18T08:06:00.000-04:00

This is from Naked Capitalism

Here is the paper.

Thoughts on Today's #OWS Victory.

2011-10-14T21:33:00.005-04:00

Obviously, lower Manhattan has been around for a long time. The asphalt and concrete of the streets of “Wall Street” are the burial mound of a city that crept north organically until gridlines exploded in rigid formation out of a time above 14^th Street. The main friction between the police and OWS protestors is over the interminable bulge of the protests out onto these sidewalks. The main concern of the police is that the protestors not interfere with the people flowing along the straight lines and sharp angles of the neighborhood.

Being downtown it becomes obvious that the “cleaning” and sanitation of the park was not an excuse to evict the protestors: it was a metaphor for the eviction. Something organic is growing at the base of the Euclidian canyons of lower Manhattan that offends this city's new sensibility. It is, after all, a beleaguered and boring cliché to point out the last two mayoral technocrats who ran our city have “sanitized it”. Not that I’m nostalgic for the New York City of the last couple decades of the 20^th century. I thank god I did not ever have to live in that city. But by occupying Wall Street the protestors have reminded us that we were sold a false dichotomy between a city in ruin—pushed there by Wall Street—and a safe and vibrant city run by and for Wall Street where people are restricted to two activities, working and consuming. OWS’s existence simply poses the question, why can’t we have a safe and vibrant city run by and for our neighbors? Why didn’t we construct our city, instead of having it constructed around us?

Beyond the dissonance of its amorphousness there is an irony to the occupation. In a sense it is bringing people back to Wall Street. The human element of the Hayekian spontaneous order has drifted away from Wall Street. Gone is the chaos of the exchange floor, the great mob of price discovery. The floor of the NYSE now stands mostly empty. The occasional trader fiddles at the new computer terminals now and again. The spontaneous order of Wall Street has become increasingly cold, automated, and too complex and artificial for human digestion; Oskar Lange would be proud. The spontaneous order of OWS, on the other hand, is of a different nature and accomplishes a miracle far more impressive than simply generating a few bits of information; the spontaneous order of OWS makes conscious decisions. The story economists tell is of markets where atomistic individuals bounce off of each other, jockeying for position, concerned only with themselves, and reaching equilibrium without intention. Through the politics of OWS, atomistic individuals bounce of each other and reach equilibrium by discovering intention.

This is of course a utopian conception of OWS but I consider OWS an experiment in my utopia. I have grown up alongside this movement, coming back to the intellectual tradition now and again. Kropotkin’s Mutual Aid, for instance, remains the best inoculation against resurgent waves of each against all social Darwinism. Whenever I come back I am always reminded that radical democracy: the spontaneous rule by the mob predicated and justified by a basic norm that justice, fairness, and the wellbeing of everyone involved is the utmost priority is the only way to build a truly just society. I have always—inevitably--put it aside in favor of compartmentalizing precisely as utopian. Not able to reconcile these abstract notions with the reality that the utopian ideology that dominates actually existing political economics is neoliberalism. I am overly fond of referring to Slavoj Zizek’s comment on Al Jazeera in which he points out that we don’t really have anything to fear from the “Islamism” of the Muslim Brotherhood because they had been forced to adopt the language of secular democracy. He contrasts this with the ideological hegemony of the Ayatollah during the Iranian revolution which forced the myriad of ideologies within Iran at the time to adopt an Ayatollah-centric position and language. Until about a month ago Neoliberalism was the only language we spoke, despite inclinations to the contrary. The great ideological conflict that threatened to devour this country is a dispute between “left” neoliberalism and “right” neoliberalism. Left neoliberalism is unpalatable because it is driven by the technocratic arrogance of the “best qualified managers.” Right neoliberalism is unpalatable because it is driven by the dogmatically naïve idea that there is no such thing as economic power. Both, of course, are unpalatable because they primarily function to advance the interests of the richest and most powerful.

OWS has given us a new language of words and actions. It was in defense of this language that 3,000 people poured into Zuccotti Park this morning, the vast majority prepared and expecting to be arrested. We all showed up this morning because there was nothing else left for us to do in the face of an arbitrary decision by a conglomeration of interests more powerful than we are. I showed up this morning to speak this new language one last time. I am probably several years older than the “median protestor.” I have lived through the gut wrenching experiences of being silenced and ignored dozens if not scores of times over the last 10 or 15 years. I have always accepted--probably as inevitable--that there was nothing left to do and I so shrugged and did nothing. This time passive acceptance of the inevitable was intolerable. I do not know what effect our showing up this morning had on allowing the core of this movement to stay lodged in the lions paw. I only know that we showed up.

Top marginal Tax Rates 1916-1920

2011-10-06T07:46:00.001-04:00

From Visualizing Economics:

Also from Visualizing Economics:

Krugman: Austerity USA

2011-10-06T07:34:00.000-04:00

From Goldman Sachs via Paul Krugman:

Defense spending as % of GDP

2011-09-29T08:21:00.000-04:00

Source: www.usgovernmentspending.com

The GI Bill and Reconversion.

2011-09-28T13:52:00.000-04:00

Unemployment Before and After the War.

Figure 1

Much of the boom feeling of the war came from the fact that unemployment was as low as the unemployment rate had ever been (or ever would be). Obviously much of the cause of this was because over the course of the war some 16 million men (and women) would be inducted into the army and large numbers of civilian we hired by the government in support roles. However, many women, older men and younger men entered the workforce which offset to an extent some the decline in "typical" workers. Figure 1 shows the change in labor force participation as a percent of the total population.

Figure 2

There was some concern that after the war these returning soldiers would come home to a retrenchment of the depression and swell the ranks of the post war unemployed. The call for a Serviceman's Readjustment act of 1944 (The GI Bill)was in large part put together in an attempt to soften the return of soldiers both for the sake of the economy and for the soldiers themselves.

There are three main aspects of the GI Bill. First, unemployment benefits of $20 for the first year after a solider was decommissioned. Second, there were provisions in the GI Bill that allowed returning soldiers to buy homes with no down payment, this will be dealt with in more detail in a later lecture. Third, and most relevant here, was the education benefit/stipend that paid up to $500 in tuition costs and after an amendment to the law in 1945 also paid a living allowance of $65 dollars a month for unmarried veterans and $90 a month with an additional allowance for dependents. They were raised once more in 1948 to $75 for a single veteran and $105 for married veterans with children. For comparison, a factory worker could make about $200 a month in 1947.

The red line in figures 1 and 2 offer a fairly crude idea of the impact of these education benefits on the post war employment situation. They suggest that the educational benefits reduced the labor force/population ratio by up to around 2.5% and reduced the unemployment rate by upwards of 4%. While these numbers should be taken with a cup of salt they do offer some evidence about the impact of educational benefits, it helped soften the impact of the returning soldiers on the job market. As well, from a Keynesian perspective they remained consumers and were the conduit for the government to funnel money into education institutions of all types. The magnitude of the effect is obviously not clear, especially since the unemployment benefits of the GI Bill probably artificially increased unemployment (though there is still the Keynesian aspect of the unemployment payments).

GI Bill education outcomes for African-Americans and whites.

Turner and Bound offer a pretty good picture of the role that WWII and the GI Bill played in the educational attainment for both blacks and whites. The picture they paint is pretty straight forward and perhaps not unexpected. It is important to approach the regression results cautiously because the confidence intervals around the estimates are fairly high though the results are still worth thinking about. At any rate, the summary tables offer us some insights.

TB Table 2

First, lets look at Table 2 from Turner and Bound. These numbers are taken from a different survey than the regression results. These numbers come from (as noted) the 1979 Survey of Veterans. About 1.9 million african-americans served in the military during the war out of a total of 16.3 million total. That works out to about 11% of the military. Given that, african-americans are slightly underrepresented in this survey, making up less than 7%).

It should be right away obvious that african-americans are less educated going into the war. As well, a slightly higher share of african-americans used GI benefits but they have far far lower college graduate rates. In fact, 5 out of the 165 african-american men in the survey received bachelors degrees. Years completed are also clearly lower.

TB Table 3

Table 3 summarizes data from the 1970 census, the pool from which Turner and Bound get their sample. Here the disparity is also clear. More whites than blacks were high school graduates and ultimately far more whites, both veterans and nonveterans went to college. However, white veterans were about twice as likely to to go to college than white nonveterans and black veterans were three times as likely to go to college if they had served in the military. That number demands a little nuance, though. First, while 6% is three times as large as 2% it remains dismal even compared to college graduate rates of nonveteran whites. Secondly, and this goes for the difference between both white and black veteran and nonveterans is that many of those called up for the draft were declared unfit for service (IV-F) becuase they failed basic literacy tests. African-Americans were rejected more often than whites on these grounds, as Turner and Bound point out in 1944 a third of african-americans were rejected becuase of basic literacy issues and less than ten percent of white draftees were. So, one would expect those serving in the military, both black and white to be more educated on average than their general postulation and you would expect black soldiers to be even more educated on average, table 3 seems to support this.

TB Table 4

Finally, table 4 from Turner and Bound divides up the african-american sample by region. I should note here that the south is defined to include seven southern states with the most stringent segregation laws (the uses a broader definition of south in the appendix). here the difference between veterans and nonveterans within each region do not seem that different. However, across the board education attainment is lower in the south than the north.

The regression results.

TB Table 5

Table 5 offers the simple regression results of Turner and Bound. The regressions suggest two things. 1. Serving in WWII and having access to GI Benefits increased the probability that a veteran would graduate college, it also meant he would stay in college longer than otherwise. 2. This is true of all groups except black men born in the south. It is important to bear in mind that these are mean effects. That means that the increase in the probability of 3.5 percentage points is significantly "water down" by the fact that only around 2 million soldiers (or 1/8th of all WWII vets) went to college. A little playing with the weights suggests that in fact the probability of finishing college if you start was increased by around 30%. There are of course a number of things to unpack from that but it does suggest that the stipend had a pretty significant effect. That should be evidence from the Atlshculer and Blumin reading which details a lot of the supply side responses to in the influx of veterans.

The effect is even more pronounced in the case of african-americans, atleast in the north. They show a higher mean effect, while at the same time a smaller share of african-american veterans attended college after the war. Again, though, that needs to be unpacked because higher education did not respond as flexibly for the benefit of african-americans as they did for white veterans and so far more african-americans were denied even entry into higher education for lack of supply. This brings me to the big takeaway from these readings. Segregation is essentially a constraint on supply.. We will see this phenomenon in spades when we talk about housing. In terms of housing, "ghettos" were not exactly natural phenomenon, they were basically created as clearly delineated spaces where african-americans were tolerated. African-americans were then crammed into these spaces with the perverse result that housing in run down ghettos (because of a lack of access to credit to make improvements) was more expensive than in comparable (though nicer) white areas of cities.

They effect on college educational outcomes for blacks is similar. The pool of colleges available to african-americans was very small and not very well funded and so there was an inelastic supply response (though enrollments at black colleges more than doubled with assistance from the federal government) to what could have been a very significant increase in demand.

Non-collegiate education under the GI Bill.

As Turner and Bound point out, college education is only a small part of the GI Bill education story. While around 2 million verterans went to college using the GI BIll about 5.6 enrolled in noncollege education programs. Altchuler and Blumin list the other programs: "3.5 million [attended] public and for-profit schhol; 1.4 million in nonagricultural on-the-job training; and 700,000 in on-the-farm training--5.6 million veterans in all..." (page 151). This spawned a boom in subcollege schooling, much of it fraudulent or of little clear value. However, while there were plenty of scams such as the "National Chicken Sexing School" the GI Bill also gave birth to what would become the Cullinary Institute of America. There was also perhaps a misallocation of training for the jobs that were avalible and important to the post war economy. Altchuler and Blumin point out that there were 30,000 students enrolled in tv and radio repair course in 1949. However, this seeming over supply also seems to suggest that man verterans were able to get training for jobs that kept them out of factories and got them into skilled jobs. All in all, though, the legacy of subcollege for-profit education after the war has not been given serious enough attention. The tone of Altchuler and blumin, however, makes on think of the contemporary for-profit college industry and their relationship to veteran s.

A Brief Economic History of WWII

2011-09-28T13:06:00.001-04:00

The following chart offers a useful comparative breakdown of the relative outlays (as a % of GNP) of the war for the major powers:

Table 1

This table illustrates something important about the war, while it absorbed a significant amount of the countries resources, the impact of the war on the domestic economy was mitigated, relatively speaking. Furthermore, the US was really the only economy that had on net experienced growth during the war:

Figure 1

Finally, here is an excellent illustration of how the US came out of the war essentially unscathed. The euphemisms of economists aside. it also makes it clear how much it sucked to be a Russian during the war.

Table 2

Now National Income and Product Accounting (NIPA, or GDP) during the war is going to be heavily distorted by price controls during the war. GDP/conumsption deflators are a whole other issue that i do not want to get involved in now (see here) so the numbers I'm going to use need to be taken with a grain of salt since they are in nominal dollars using official price levels. Also a refresher of GDp accounting may be useful.

Purchases of newly produced final goods and services can be decomposed as such

Output (Y) = Consumption (C) + Investment Spending (I) + Government Spending (G) + Exports - Imports (EX-IM)

(1)Y = C + G + I + (EX -IM)

This accounting identity then divides up production between the different sectors of the economy. From the table above, its clear that G (in the form of military spending) is crowding out other activity. This manifest itself in two related ways. Inflation and shortages. Inflation I will deal will separately but shortages caused by the war primairly manifest themselves in durable goods (C), in particular housing in wartime boom towns and in cars and car parts (rubber). Also, meat becomes hard to find. Investment (I) on "nonwar" production also gets crowded out.

While these inconveniences were real in the US there is the other side of the NIPA coin. Identity 1 measures the sales of final goods and services. Naturally, if something is produced and sold that is income for the seller. The sellers here are the owners of the "factors of production" that went into producing the good (Land, Labor, Capital and "Management"). So we can write another identity based on what income can be used for:

Y = Consumption (C) + Savings (S) + Taxes (T)

(2) Y= C + S + T

I would hazard that identity 2 is ultimately how most people "experience" GDP. The following two charts show the change in personal income during the war:

Figure 2

Figure 3

Converting nominal product/income to real variables is a messy business for this war period and I will not dwell on it. However, I have included a couple of constructed deflators to give you more of a sense of what disposable income growth looked like. Disposable income, of course, is simply income minus taxes and so it gives one a good idea of what peoples after-tax paychecks looked like and what they "spent it on" in a very general sense.

One obvious thing that stands out from looking at the two graphs is that the war put a big wedge between disposable income and consumption. That, of course, is savings. There was an "excess" of savings created by the war above and beyond normal rates of savings. During the depression saving was low because income was low very roughly speaking savings rates were around 2%. After the war household savings were around 7% or so. Household savings rates during the war were around 21% (Edelstien p164).

The other thing that is striking from figure 2 is that there was a wedge driven between personal income and disposable income. This, of course, is the increase in taxes paid by households during the war. That increased tax burden comes fromt wo places. First, the marginal tax rate on lowest income bracket was 4% in 1940 on incomes of $0 to $4000. It increased to 10% in 1941, and then 19% in 1942 on incomes of $0 to $2000. It increase slightly to 23% in 1944.[1] However, more important to tax collection was the fact that in 1943 the federal government instituted its system of pre-withholding taxes directly out of paychecks. This, naturally, amounted to much better enforcement of the tax code and greater tax collection. While the increase in taxes were driven by a need to finance the war, there was a secondary goal: reducing inflation. The result of increasing taxes would have been what you would expect, less disposable income means less money to spend on goods and services. It's not obvious, however, that the decrease in disposable income would have come out of consumption and not savings. However, an increase in taxes would have meant less reliance on inflationary methods of financing the war.

Financing the war.

This brings us to the next thing I want to highlight: how the war was financed. According to Micheal Edelstein 42.5% of the war was financed by taxation. Only a a third (33.7%) was financed through borrowing from the "nonbank public". The balance (23.8%) was financed though money creation. The war was financed so heavily by money creation because of the Federal Reserves policy of keeping rates on treasury bonds very low. The Fed targeted the yield curve from 3/8th of a percent for short term to 2.5% for long term bonds. This of course meant that the Fed had to be prepared to buy any excess debt above what the market would purchase at that level. Compounding, demand for shorter term bills by banks declined becuase a stable interest rate also meant stable bond prices essentially making longer term bonds better than cash since they paid a (small) riskless return.

Below is a table from Edelstein that shows the increase in debt by who held it. It also shows a more than doubling of the money supply through the course of the war.

[1] http://www.taxfoundation.org/publications/show/151.html

David Graeber on the Origins of Money

2011-09-13T10:55:00.000-04:00

So, I was debating whether I was going to assign the first chapter of "Debt: The First 5,000 years" by the anthropologist David Graeber to you money and banking students since I had brought it up in class. Fortunately for you, a argument on the internet has provided a very concise and clear distillation of the chapter by the author himself. It is quite long for a blog post, but well worth the read, especially considering the alternative is reading the full 50 page chapter. Graeber is making his points in the context of a debate (argument?), but that element of the text is minimal and easily skipped over.

Also of interest is the original interview with Graeber referred to.

This comes from Naked Capitalism.:

Last week, Robert F. Murphy published a piece on the webpage of the Von Mises Institute responding to some points I made in a recent interview on Naked Capitalism, where I mentioned that the standard economic accounts of the emergence of money from barter appears to be wildly wrong. Since this contradicted a position taken by one of the gods of the Austrian pantheon, the 19th century economist Carl Menger, Murphy apparently felt honor-bound to respond.
In a way, Murphy’s essay barely merits response. In the interview I’m simply referring to arguments made in my book, ‘Debt: The First 5000 Years’. In his response, Murphy didn’t even consult the book; in fact he later admitted he was responding at least in part not even to the interview but to an inaccurate summary of my position someone had made in another blog!
We are not, in other words, dealing with a work of scholarship. However, in the blogsphere, the quality or even intention of an argument often doesn’t matter. I have to assume Murphy was aware that all he had to do was to write something—anything really—and claim it rebutted me, and the piece would be instantly snatched up by a right-wing echo chamber, mirrored on half a dozen websites and that followers of those websites would then dutifully begin appearing across the web declaring to everyone willing to listen that my work had been rebutted. The fact that I instantly appeared on the Von Mises web page to offer a detailed response, and that Murphy has since effectively conceded, writing an elaborate climb-down saying that he had no intention to cast doubt on my argument as a whole at all, only to note that I had not definitively disproved Menger’s, has done nothing to change this. Indeed, on both US and UK Amazon, I have seen fans of Austrian economics appear to inform potential buyers that I am an economic ignoramus whose work has been entirely discredited.
I am posting this more detailed version of my reply not just to set the record straight, but because the whole question of the origins of money raises other interesting questions—not least, why any modern economist would get so worked up about the question. Let me begin by filling in some background on the current state of scholarly debate on this question, explain my own position, and show what an actual debate might have been like.
First, the history:

1) Adam Smith first proposed in ‘The Wealth of Nations’ that as soon as a division of labor appeared in human society, some specializing in hunting, for instance, others making arrowheads, people would begin swapping goods with one another (6 arrowheads for a beaver pelt, for instance.) This habit, though, would logically lead to a problem economists have since dubbed the ‘double coincidence of wants’ problem—for exchange to be possible, both sides have to have something the other is willing to accept in trade. This was assumed to eventually lead to the people stockpiling items deemed likely to be generally desirable, which would thus become ever more desirable for that reason, and eventually, become money. Barter thus gave birth to money, and money, eventually, to credit.
2) 19th century economists such as Stanley Jevons and Carl Menger [1] kept the basic framework of Smith’s argument, but developed hypothetical models of just how money might emerge from such a situation. All assumed that in all communities without money, economic life could only have taken the form of barter. Menger even spoke of members of such communities “taking their goods to market”—presuming marketplaces where a wide variety of products were available but they were simply swapped directly, in whatever way people felt advantageous.
3) Anthropologists gradually fanned out into the world and began directly observing how economies where money was not used (or anyway, not used for everyday transactions) actually worked. What they discovered was an at first bewildering variety of arrangements, ranging from competitive gift-giving to communal stockpiling to places where economic relations centered on neighbors trying to guess each other’s dreams. What they never found was any place, anywhere, where economic relations between members of community took the form economists predicted: “I’ll give you twenty chickens for that cow.” Hence in the definitive anthropological work on the subject, Cambridge anthropology professor Caroline Humphrey concludes, “No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money; all available ethnography suggests that there never has been such a thing” [2]
a. Just in way of emphasis: economists thus predicted that all (100%) non-monetary economies would be barter economies. Empirical observation has revealed that the actual number of observable cases—out of thousands studied—is 0%.
b. Similarly, the number of documented marketplaces where people regularly appear to swap goods directly without any reference to a money of account is also zero. If any sociological prediction has ever been empirically refuted, this is it.
4) Economists have for the most part accepted the anthropological findings, if directly confronted with them, but not changed any of the assumptions that generated the false predictions. Meanwhile, all textbooks continue to report the same old sequence: first there was barter, then money, then credit—except instead of actually saying that tribal societies regularly practiced barter, they set it up as an imaginative exercise (“imagine what you would have to do if you didn’t have money!” or vaguely imply that anything actual tribal societies did do must have been barter of some kind.

So what I said was in no way controversial. When confronted on why economists continue to tell the same story, the usual response is: “Well, it’s not like you provide us with another story!” In a way they have a point. The problem is, there’s no reason there should be a single story for the origin of money. Here let me lay out my own actual argument:

1) If money is simply a mathematical system whereby one can compare proportional values, to say 1 of these is worth 17 of those, which may or may not also take the form of a circulating medium of exchange, then something along these lines must have emerged in innumerable different circumstances in human history for different reasons. Presumably money as we know it today came about through a long process of convergence.
2) However, there is every reason to believe that barter, and its attendant ‘double coincidence of wants’ problem, was not one of the circumstances through which money first emerged.
a. The great flaw of the economic model is that it assumed spot transactions. I have arrowheads, you have beaver pelts, if you don’t need arrowheads right now, no deal. But even if we presume that neighbors in a small community are exchanging items in some way, why on earth would they limit themselves to spot transactions? If your neighbor doesn’t need your arrowheads right now, he probably will at some point in the future, and even if he won’t, you’re his neighbor—you will undoubtedly have something he wants, or be able to do some sort of favor for him, eventually. But without assuming the spot trade, there’s no double coincidence of wants problem, and therefore, no need to invent money.
b. What anthropologists have in fact observed where money is not used is not a system of explicit lending and borrowing, but a very broad system of non-enumerated credits and debts. In most such societies, if a neighbor wants some possession of yours, it usually suffices simply to praise it (“what a magnificent pig!”); the response is to immediately hand it over, accompanied by much insistence that this is a gift and the donor certainly would never want anything in return. In fact, the recipient now owes him a favor. Now, he might well just sit on the favor, since it’s nice to have others beholden to you, or he might demand something of an explicitly non-material kind (“you know, my son is in love with your daughter…”) He might ask for another pig, or something he considers roughly equivalent in kind. But it’s almost impossible to see how any of this would lead to a system whereby it’s possible to measure proportional values. After all, even if, as sometimes happens, the party owing one favor heads you off by presenting you with some unwanted present, and one considers it inadequate—a few chickens, for example—one might mock him as a cheapskate, but one is unlikely to feel the need to come up with a mathematical formula to measure just how cheap you consider him to be. As a result, as Chris Gregory observed, what you ordinarily find in such ‘gift economies’ is a broad ranking of different types of goods—canoes are roughly the same as heirloom necklaces, both are superior to pigs and whale teeth, which are superior to chickens, etc—but no system whereby you can measure how many pigs equal one canoe. [3]
3) All this is not to say that barter never occurs. It is widely attested in many times and places. But it typically occurs between strangers, people who have no moral relations with one another. There is a reason why in just about all European languages, the words ‘truck and barter’ originally meant ‘to bilk, swindle, or rip off.’ [4] Still there is no reason to believe such barter would ever lead to the emergence of money. This is because barter takes three known forms:
a. Barter can take the form of occasional interactions between people never likely to meet each other again. This might involve ‘double coincidence of wants’ problems but it will not lead to the emergence of a system of money because rare and occasional events won’t lead to the emergence of a system of any kind.
b. If there are ongoing trade relations between strangers in moneyless economies, it’s because each side knows the other side has some specific product(s) they want to acquire—so there is no ‘double coincidence of wants’ problem. Rather than leading to people having to create some circulating medium of exchange (money) to facilitate transactions, such trade normally leads to the creation of a system of traditional equivalents relatively insulated from vagaries of supply and demand.
c. Sometimes, barter becomes a widespread mode of interaction when you have people used to using money in everyday transactions who are suddenly forced to carry on without it. This can happen, for instance, because the money supply dries up (Russia in the ‘90s), or because the people in question have no access to it (prisoners or denizens of POW camps.) This cannot lead to the invention of money because money has already been invented. [5]

So this is the actual argument, which Prof. Murphy could easily have ascertained with a glance at the relevant chapter of the book.
It’s easy to see from this that his counter-arguments range from extremely weak to completely irrelevant. Let me take them on in turn, such as they are

• Murphy argues that the fact that there are no documented cases of barter economies doesn’t matter, because all that is really required is for there to have been some period of history, however brief, where barter was widespread for money to have emerged. This is about the weakest argument one can possibly make. Remember, economists originally predicted all (100%) non-monetary economies would operate through barter. The actual figure of observable cases is 0%. Economists claim to be scientists. Normally, when a scientist’s premises produce such spectacularly non-predictive results, the scientist begins working on a new set of premises. Saying “but can you prove it didn’t happen sometime long long ago where there are no records?” is a classic example of special pleading. In fact, I can’t prove it didn’t. I also can’t prove that money wasn’t introduced by little green men from Mars in a similar unknown period of history. Given the weight of the evidence, the burden of proof is on the Murphys of the world to produce some plausible reason why all observable cases of moneyless societies fail to operate the way Menger predicted, and therefore, why we have any reason to believe some unknown age would have been any different; and this, he does not even attempt to do.
• Murphy then goes on to produce a straw man saying that a system where people borrow things from one another and then turn to political authorities to regulate the system would not produce money. True enough, but it seems a bit irrelevant considering (a) I never say people would be “borrowing” from each other in the way he describes, (b) I never attribute any role to political authorities in this process, and (c) rather than saying the informal system of favors I do describe would lead to the invention of money, I explicitly say that it would not.
• He then restates Menger’s argument about how money could emerge from barter, an argument that given the weight of evidence so far presented would only be relevant if there was some reason to believe money could not have emerged in any other way. He gives no such reason, other than that he cannot personally imagine money emerging any other way.
• Murphy ends by noting the famous study of how widespread barter between prisoners in POW camps seem to have led to the use of cigarettes as money—an argument which, if he had bothered to read the entire interview, let alone the book, he would have known is actually a confirmation of my argument (see 3c above) and not a refutation.

To be fair, Murphy has one other argument—he adopts the position, first proposed by Karl Marx [!], that money first emerged from barter in the process of international trade. The evidence is as follows: while the first records we have of money are administrative documents from Mesopotamia, in which money is used almost exclusively in keeping accounts within large bureaucratic organizations (Temples and Palaces), the system is based on a fixed equivalence between barley and silver, and that since silver was a trade item, this shows that Mesopotamian merchants must have been using silver as a medium of exchange in spot transactions with long-distance trade partners for that system to then be adopted as a unit of account in administrative transactions within Temples. This merits a bit more of a response—not because it is a particularly cogent argument (it’s basically circular: “since money can only have arisen through barter, if silver was money, it must have arisen through barter”), but because it raises some interesting questions about how money actually did emerge.
As I remarked above, occasional, irregular exchange between strangers will not generate a money system—since irregular, occasional exchange will not produce any kind of system. In ancient times, if you do see regular exchange between strangers, it’s because there are specific goods that each side knows they want or need. One has to bear in mind that under ancient conditions, long-distance trade was extremely dangerous. You don’t cross mountains, deserts, and oceans, risking death in a dozen different ways, so as to show up with a collection of goods you think someone might want, in order to see if they happen to have something you might want too. You show up because you know there are people who have always wanted woolens and who have always had lapis lazuli. As noted above, logically, what such a situation would lead to is a series of conventional equivalences—so many woolens for so many pieces of lapis lazuli—equivalences which are likely to be maintained despite contingencies of supply and demand, because all parties need to reduce risk in order to be able to continue to the trade at all. And once again, what logic would predict is precisely what we find. Even in periods of human history where money and markets did already exist, merchants often continue to conduct high-risk long distance trade through a system of conventional equivalents, or if money is used, administered prices, between specific commodities they know will be available, or in demand, at certain pre-established locations.
One might of course ask, could not such a system generate something like money of account—that is, the use of one or two relatively desirable commodities to measure the value of other ones, once more items were added to the mix (say, our merchant is making several stops)? The answer is yes. No doubt in certain circumstances, something like this did happen. Of course, it would have meant that money, in such cases, was first created as a means to avoid market mechanisms, and that it was not used mainly as a medium of transactions, but rather, primarily as a means of account. One could even make up an imaginary scenario whereby once you start using one divisible/portable/etc commodity as a means of establishing fixed equivalents between other ones, you could start using it for minor occasional transactions, to measure negotiated prices for spot trade swaps on the side, in a more market-driven way. All that is possible and likely as it did happen now and again—after all, we’re dealing with thousands of years here. Likely all sorts of things happened over this long period. However, there is no reason to assume that such a system would produce a concrete medium of exchange regularly used in making these transactions—in fact, given the dangers of ancient trade, insisting that some medium like silver actually be used in all transactions, rather than a credit system, would be completely irrational, since the need to carry around such a money-stuff would make one a far, far, more attractive target to potential thieves. A desert nomad band might not attack a caravan carrying lapis lazuli, especially if the only potential buyers were temples which would probably know all the active merchants and know that you had stolen the stuff (and even if you could trade for them, what are you going to do with a big pile of woolens anyway, you live in a desert?) but they’d definitely go after someone carrying around a universal equivalent. (This is presumably the reason why the great long-distance traders of the Classical World, the Phoenicians, were among the last to adopt coinage—if money was invented as a circulating medium for long-distance trade, they should have been the first.)
The other problem is that there is no reason to believe that such a mechanism—which would presumably only be used by that tiny proportion of the population who engaged in long distance trade, and who tended to treat such matters as specialized knowledge to be guarded from outsiders—could possibly create a money system used in everyday transactions within a society or any evidence that it might have done so.
The actual evidence is that in Mesopotamia—the first case we know anything about—these more widespread pricing systems in fact emerged as a side-effect of non-state bureaucracies. Again, non-state bureaucracies are a phenomenon that no economic model would even have anticipated existing. It’s off the map of economic theory. But look at the historical record and there they are. Sumerian Temples (and even many of the early Palace complexes that imitated them) were not states, did not extract taxes or maintain a monopoly of force, but did contain thousands of people engaged in agriculture, industry, fishing, and herding, people who had to be fed and provisioned, their inputs and outputs measured. All evidence that exists points to money emerging as a series of fixed equivalent between silver—the stuff used to measure fixed equivalents in long distance trade, and conveniently stockpiled in the temples themselves where it was used to make images of gods, etc.—and grain, the stuff used to pay the most important rations from temple stockpiles to its workers. Hence, as economist and Naked Capitalism contributor Michael Hudson has so brilliantly demonstrated [6], a silver shekel was fixed as the amount of silver equivalent to the numbers of bushels of barley that could provide two meals a day for a temple worker over the course of a month. Obviously such a ration system would be of no interest to a merchant.
So even if some sort of rough system of fixed equivalences, measured by silver, might have emerged in the process of trade (note again: not a system of actual silver currency emerging from barter), it was the Temple bureaucracies that actually had some reason to extend the system from a unit used to compare the value of a limited number of rare items traded long distance, used almost exclusively by members of the political or administrative elite, to something that could be used to compare the values of everyday items. The development of local markets within cities, in turn, came as a side effect of these systems, and all evidence shows they too operated primarily through credit. For instance, Sumerians, though they had the technological means to do so, never produced scales accurate enough to weigh out the tiny amounts of silver that would have been required to buy a single cask of beer, or a woolen tunic, or a hammer—the clearest indication that even once money did exist, it was not used as a medium of exchange for minor transactions, but rather as a means of keeping track of transactions made on credit.
In many times and places, one sees a similar arrangement: two sorts of money, one, a common long-distance trade item, the other, a common subsistence item—cattle, grain—that’s stockpiled, but never traded. Still, Temple bureaucracies and their ilk are something of a rarity. In their absence, how else might a system of pricing, of proportional equivalents between the values of any and all objects, potentially arise? Here again, anthropology and history both provide one compelling answer, one that again, falls off the radar of just about all economists who have ever written on the subject. That is: legal systems.
If someone makes an inadequate return you will merely mock him as a cheapskate. If you do so when he is drunk and he responds by poking your eye out, you are much more likely to demand exact compensation. And that is, again, exactly what we find. Anthropology is full of examples of societies without markets or money, but with elaborate systems of penalties for various forms of injuries or slights. And it is when someone has killed your brother, or severed your finger, that one is most likely to stickle, and say, “The law says 27 heifers of the finest quality and if they’re not of the finest quality, this means war!” It’s also the situation where there is most likely to be a need to establish proportional values: if the culprit does not have heifers, but wishes to substitute silver plates, the victim is very likely to insist that the equivalent be exact. (There is a reason the word ‘pay’ comes from a root that means ‘to pacify’.)
Again, unlike the economists’ version, this is not hypothetical. This is a description of what actually happens—and not only in the ethnographic record, but the historical one as well. The numismatist Phillip Grierson long ago pointed to the existence of such elaborate systems of equivalents in the Barbarian Law Codes of early Medieval Europe. [7]For example, Welsh and Irish codes contain extremely detailed price schedules where in the Welsh case, the exact value of every object likely to be found in someone’s house were worked out in painstaking detail, from cooking utensils to floorboards—despite the fact that there appear to have been, at the time, no markets where any such items could be bought and sold. The pricing system existed solely for the payment of damages and compensation—partly material, but particularly for insults to people’s honor, since the precise value of each man’s personal dignity could also be precisely quantified in monetary terms. One can’t help but wonder how classical economic theory would account for such a situation. Did the ancient Welsh and Irish invent money through barter at some point in the distant past, and then, having invented it, kept the money, but stopped buying and selling things to one another entirely?
The persistence of the barter myth is curious. It originally goes back to Adam Smith. Other elements of Smith’s argument have long since been abandoned by mainstream economists—the labor theory of value being only the most famous example. Why in this one case are there so many desperately trying to concoct imaginary times and places where something like this must have happened, despite the overwhelming evidence that it did not?
It seems to me because it goes back precisely to this notion of rationality that Adam Smith too embraced: that human beings are rational, calculating exchangers seeking material advantage, and that therefore it is possible to construct a scientific field that studies such behavior. The problem is that the real world seems to contradict this assumption at every turn. Thus we find that in actual villages, rather than thinking only about getting the best deal in swapping one material good for another with their neighbors, people are much more interested in who they love, who they hate, who they want to bail out of difficulties, who they want to embarrass and humiliate, etc.—not to mention the need to head off feuds.
Even when strangers met and barter did ensue, people often had a lot more on their minds than getting the largest possible number of arrowheads in exchange for the smallest number of shells. Let me end, then, by giving a couple examples from the book, of actual, documented cases of ‘primitive barter’—one of the occasional, one of the more established fixed-equivalent type.
The first example is from the Amazonian Nambikwara, as described in an early essay by the famous French anthropologist Claude Levi-Strauss. This was a simple society without much in the way of division of labor, organized into small bands that traditionally numbered at best a hundred people each. Occasionally if one band spots the cooking fires of another in their vicinity, they will send emissaries to negotiate a meeting for purposes of trade. If the offer is accepted, they will first hide their women and children in the forest, then invite the men of other band to visit camp. Each band has a chief and once everyone has been assembled, each chief gives a formal speech praising the other party and belittling his own; everyone puts aside their weapons to sing and dance together—though the dance is one that mimics military confrontation. Then, individuals from each side approach each other to trade:

If an individual wants an object he extols it by saying how fine it is. If a man values an object and wants much in exchange for it, instead of saying that it is very valuable he says that it is worthless, thus showing his desire to keep it. ‘This axe is no good, it is very old, it is very dull’, he will say… [8]

In the end, each “snatches the object out of the other’s hand”—and if one side does so too early, fights may ensue.
The whole business concludes with a great feast at which the women reappear, but this too can lead to problems, since amidst the music and good cheer, there is ample opportunity for seductions (remember, these are people who normally live in groups that contain only perhaps a dozen members of the opposite sex of around the same age of themselves. The chance to meet others is pretty thrilling.) This sometimes led to jealous quarrels. Occasionally, men would get killed, and to head off this descending into outright warfare, the usual solution was to have the killer adopt the name of the victim, which would also give him the responsibility for caring for his wife and children.
The second example is the Gunwinngu of West Arnhem land in Australia, famous for entertaining neighbors in rituals of ceremonial barter called the dzamalag. Here the threat of actual violence seems much more distant. The region is also united by both a complex marriage system and local specialization, each group producing their own trade product that they barter with the others.
In the 1940s, an anthropologist, Ronald Berndt, described one dzamalag ritual, where one group in possession of imported cloth swapped their wares with another, noted for the manufacture of serrated spears. Here too it begins as strangers, after initial negotiations, are invited to the hosts’ camp, and the men begin singing and dancing, in this case accompanied by a didjeridu. Women from the hosts’ side then come, pick out one of the men, give him a piece of cloth, and then start punching him and pulling off his clothes, finally dragging him off to the surrounding bush to have sex, while he feigns reluctance, whereon the man gives her a small gift of beads or tobacco. Gradually, all the women select partners, their husbands urging them on, whereupon the women from the other side start the process in reverse, re-obtaining many of the beads and tobacco obtained by their own husbands. The entire ceremony culminates as the visitors’ men-folk perform a coordinated dance, pretending to threaten their hosts with the spears, but finally, instead, handing the spears over to the hosts’ womenfolk, declaring: “We do not need to spear you, since we already have!” [9]
In other words, the Gunwinngu manage to take all the most thrilling elements in the Nambikwara encounters—the threat of violence, the opportunity for sexual intrigue—and turn it into an entertaining game (one that, the ethnographer remarks, is considered enormous fun for everyone involved). In such a situation, one would have to assume obtaining the optimal cloth-for-spears ratio is the last thing on most participants’ minds. (And anyway, they seem to operate on traditional fixed equivalences.)
Economists always ask us to ‘imagine’ how things must have worked before the advent of money. What such examples bring home more than anything else is just how limited their imaginations really are. When one is dealing with a world unfamiliar with money and markets, even on those rare occasions when strangers did meet explicitly in order to exchange goods, they are rarely thinking exclusively about the value of the goods. This not only demonstrates that the Homo Oeconomicus which lies at the basis of all the theorems and equations that purports to render economics a science, is not only an almost impossibly boring person—basically, a monomaniacal sociopath who can wander through an orgy thinking only about marginal rates of return—but that what economists are basically doing in telling the myth of barter, is taking a kind of behavior that is only really possible after the invention of money and markets and then projecting it backwards as the purported reason for the invention of money and markets themselves. Logically, this makes about as much sense as saying that the game of chess was invented to allow people to fulfill a pre-existing desire to checkmate their opponent’s king.

* * *

At this point, it’s easier to understand why economists feel so defensive about challenges to the Myth of Barter, and why they keep telling the same old story even though most of them know it isn’t true. If what they are really describing is not how we ‘naturally’ behave but rather how we are taught to behave by the market—well who, nowadays, is doing most of the actual teaching? Primarily, economists. The question of barter cuts to the heart of not only what an economy is—most economists still insist that an economy is essentially a vast barter system, with money a mere tool (a position all the more peculiar now that the majority of economic transactions in the world have come to consist of playing around with money in one form or another) [10]—but also, the very status of economics: is it a science that describes of how humans actually behave, or prescriptive, a way of informing them how they should? (Remember, sciences generate hypothesis about the world that can be tested against the evidence and changed or abandoned if they don’t prove to predict what’s empirically there.)
Or is economics instead a technique of operating within a world that economists themselves have largely created? Or is it, as it appears for so many of the Austrians, a kind of faith, a revealed Truth embodied in the words of great prophets (such as Von Mises) who must, by definition be correct, and whose theories must be defended whatever empirical reality throws at them—even to the extent of generating imaginary unknown periods of history where something like what was originally described ‘must have’ taken place?
REFERENCES
[1] Jevons, W. Stanley, Money and the Mechanism of Exchange. New York: Appleton and Company, 1885, and Menger, Carl, “On the origins of money.” Economic Journal 1892 v.2 no 6, pp. 239-55
[2] Humphrey, Caroline, “Barter and Economic Disintegration.” Man 1985 v.20: 48. Other anthropologists have gone even further, for instance Anne Chapman, “Barter as a Universal Mode of Exchange.” L’Homme 1980 v22 (3): 33-83), argues that if pure barter is to be defined as only about the things, and not about the people, it’s not clear that it has ever existed—as the cases cited at the end of this essay indeed illustrate.
[3] Gregory, Chris, Gifts and Commodities. New York: Academic Press (1982): pp. 48-49. On gift economies, the classic text is Mauss, Marcel, Essai sur le don. Forme et raison de l’échange dans les sociétés archaïques.” Annee sociologique, 1924 no. 1 (series 2):30-186. On spheres on exchange in general see Bohannan, Paul “Some Principles of Exchange and Investment among the Tiv,” American Anthropologist 1955 v57:60-67; Barth, Frederick, “Economic Spheres in Darfur.” Themes in Economic Anthropology, ASA Monographs (London, Tavistock) 1969 no. 6, pp. 149-174; cf Munn, Nancy, The Fame of Gawa: A Symbolic Study of Value Transformation in a Massim (Papua New Guinea) Society, 1986, Cambridge, Cambridge University Press, and Akin, David and Joel Robbins, “An Introduction to Melanesian Currencies: Agencies, Identity, and Social Reproduction” in Money and Modernity: State and Local Currencies in Melanesia (David Akin and Joel Robbins, editor), pp. 1-40. Pittsburgh: University of Pittsburgh Press.
[4] Servet, Jean-Michel, 1994 “La fable du troc,” numero spécial de la revue XVIIIe siècle, Economie et politique, n°26: 103-115
[5] The classic work on the economics of POW camps, whence this argument derives, is Radford, R. A., “The Economic Organization of a POW Camp.” Economica 1945 v.12 (48): 189-201. There is an excellent critique of the assumptions underlying it in Ingham, Geoffrey, “Further Reflections on the Ontology of Money,” Economy and Society 2006 v 36 (2): 264-65, which notes among other things the obvious point that the entire camp environment was created and maintained by a bureaucratic organization that supplied all actual necessities—food, shelter, etc—through administrative distribution.
[6] Hudson, Michael,“The Development of Money-of-Account in Sumer’s Temples.” In Creating Economic Order: Record-Keeping, Standardization and the Development of Accounting in the Ancient Near East (Michael Hudson and Cornelia Wunsch, editors, 2004), pp. 303-329. Baltimore: CDL Press.
[7] Grierson, Phillip, “The Origins of Money.” In Research in Economic Anthropology 1978, v. I, pp. 1-35. Greenwich: Journal of the Anthropological Institute Press.
[8] Levi-Strauss, Claude, “Guerre et commerce chez les Indiens d’Amérique du Sud.” Renaissance. Paris: Ecole Libre des Hautes Études, 1943 vol, 1, fascicule 1 et 2.
[9] Berndt, Ronald M., “Ceremonial Exchange in Western Arnhem Land.” Southwestern Journal of Anthropology 1951 v.7 (2): 156-176.
[10] See for instance Dillard, Dudley, “The Barter Illusion in Classical and Neoclassical Economics”, Eastern Economic Journal 1988v14 (4):299-318.

Breaking Windows.

2011-08-25T09:34:00.003-04:00

The broken widow debate is raging once more through the blogosphere Dan Kuehen points us to Robert Fellner who offers in Dan Kuehen words "Higgs's critique of government spending". its reminded me of why the Higgs critique doesn't hold much water. Also, while I'm exercising some pet peeves about the Higgsian conception of GDP I would like to discuss some nuances of the Broken Window/Alien Invasion/WWII debate.

I've spent a lot of time with Higgs's thinking about GDP. Much of his argument centers around an argument of authority invoking Simon Kuznets. The problem is that Kuznets never really figured out how to deal with government in GDP accounting becuase it was developed before WWII and the rise of the "welfare state" proper. In Kuznet's conception GDP was a kind of welfare accounting and that goods and services were categorized in terms whether they were welfare inducing now (C) or welfare inducing later (I). However, some goods defied this simple categorization, in particular munitions The issue was how do you characterize something like munitions? If it is not welfare enhancing today or tomorrow, the argument runs, then they must be intermediate goods and thus not part of GDP*. But of course you now run into the problem that you are arbitrarily assigning goods as intermediate and final goods based on whether you think they are welfare enhancing or not. The solution to the problem is to adopt the approach the BEA eventually did, which is simply trace the production process of goods to their "end purchaser" and call those final goods. However, this means that GDP is not a measure of welfare, it is an accounting identity.

Now, to the extent that one is tempted to use NIPA as a proxy for welfare the Higgsian view should be criticized because it ignores the flip side of national product: national income. If the government pays someone to fix a broken window or dig a trench, that person's welfare has been increased regardless of whether he has produced anything strictly welfare enhancing for someone else (I'll come back to the net effect in a second).

The second prong in the Higgsian critique is that government purchases do not take place at market prices.

Here I'll let Robert Fellner explain it:

To see why, we first have to understand why spending at all can be considered a measure of wealth. Upon reflecting on this matter, we realize it has to do with prices (specifically market prices) and the information that they convey. Whereas one finds his lot improved by the purchase of 5 wheelbarrows at the market price of 10 dollars a wheelbarrow, we can conclude the individual, and thus the economy as a whole, is wealthier to the tune of the utility that 50 dollars in spending has granted him, specifically the subjective value of the additional 5 wheelbarrows. Moreover the spending of 50 dollars represents the creation of these 5 wheelbarrows and of course the additional utility they grant, hence why they were purchased. This is the key. Wealth is not measured simply by the dollar amount of spending. Wealth comes from the goods and services provided in exchange for money. This is why spending matters and is accurate as an indicator of wealth. If any part of this process is diluted, the quality of spending as an accurate indicator of wealth diminishes greatly.

So why does consumer spending work well in this regard, where government spending fails? The answer lies in the prices. In a free market, all participants are subject to the profit and loss test. Namely, if one consistently spends more than he earns, he eventually becomes bankrupt and removed from the market altogether. In order to prevent this "death by free-market" one must learn to generate a profit; which is done by allocating resources efficiently. As all market participants engage with one another in this task, prices emerge for all the various goods and services within the economy that reflect their valuation to the economy as a whole (the price of course being derived both from the subjective valuation of the good as measured against the scarcity of the good, put more simply: supply versus demand).

This ignores three basic things. First, it ignores the work of Alfred Chandler (And J.K. Galbraith, btw) who has in great detail explained how large firms in certain industries vertically and horizontally integrate specifically to avoid having their production process (and prices) dictated by "the market" but rather prices are determined by negotiations between divisions of the firm. In similar fashion, the government does not simply dictate prices but rather negotiates them with firms (when they have some degree of monopsony power at least). Is negotiation really a less efficient means of price discovery than anonymous markets? Are anonymous markets really the dominant free market structure anyway? I'm less inclined to assume no to both of the questions than an Austrian is. Anyway, I'm not denying gold plating but I am suggesting that the price the government pays is not a priori less arbitrary than the price early adopters pay for an Iphone (to illustrate this from a different angle).

That may have been a clumsy segue but there is a more fundamental problem with the idea that "market prices" capture welfare better than government prices. Even assuming all C and I are allocated by perfectly competitive markets competitive prices only capture the exact utility produced by the good for the last (marginal) buyer. Everyone else in the market is accruing either a consumer surplus or a producer surplus. To capture that involves a whole series of arbitrary assumptions that are impossible to make and best avoided taking NIPA for what it is.

Again, though, if we look at income it may be easier to make welfare statements. If the government buys a loaf of bread from the baker it seems easier to make welfare statements (though I still advise against it even if I am as prone to do it as everyone else). The baker's welfare is unambiguously higher if the government (or anyone) pays $100 for his loaf of bread instead of $1. Unlike the troubles you run into with trying to make wealth/utility statements about who purchases what for who and why we can make a relatively uncontroversial statement that more income is better.

Okay, so now on to net effects. There are definitely certain conditions under which the broken window falacy is wrong. The increase in GDP from fixing a broken window from one of the many curiosities of NIPA accounting that, again, underscore why you shouldn't act like GDP literally means total wealth, utility or welfare. If I grow my own wheat and bake my own bread it doesn't count as GDP but if I buy it from the baker it does despite the fact that the same "utility" or wealth is created when I make my own bread (ignoring issues of scale efficencies***). Likewise, fixing a broken window shows up as GDP even though I as an individual would be better off if the market transaction never happened and I spend my broken window money on components of GDP I actually want to spend them on.

However, if the government borrows money to fix my window there are conditions (that aren't that ridiculous to meet and where the WWII example is instructive) where there can a net increase in GDP as income as welfare. The relevant variable here is the Debt to GDP ratio (not the absolute level of debt, so take your Ricardain equivalence somewhere else) which allows the broken widow theory to work because there is no full redistribution through taxes. The government can borrow today, give me the money to fix my window and then sit on the debt for as long as it needs to and let the burden of that debt shrink (under certain growth/interest rate conditions) away as nominal GDP growth increases, paying only the cost to service the debt as it shrinks. This spending, by the way, also increases nominal GDP grow at the point in time that I pay for my new window assuming no crowding out it will directly off set itself and there will be no increase in Debt/GDP. You can also tell a story where this could happen through the private sector provided as favorable borrowing terms as (or the ability to set interest rates like) the government. However, one should be reminded that the likes of Paul Krugman only advocate the building of FEMA death camps when the market has failed to produce full employment. In which case the government is also making savers better off because it is giving individuals something to hold that pays at least some kind of risk adjusted return in olight of a lack of investment. Individual svaes can be made better off even though on aggregate the whole point is to finance today with something that will be insignificant tomorrow.

Now, we can debate whether the relevant variables that determine the shrinking of the debt hold or that the inflationary bias is too much, or the size of the multiplier but the basic principle stands.

*For the uninitiated: GDP is the purchase of newly produced final goods and services. This is distinct from intermediate goods which are inputs into the production of final goods and services. The reason for this distinction is becuase final goods and services already contain all the costs of the inputs (and factors of production**) that went into making them. We use final goods and services as a measure of output becuase final goods and services contain the value of everything that goes into making them and so we get a full measure of the "output" of the economy.

**A "factor of production" is something that does not get "used up" in the production of a good. This is distinct from an "input" which does get used up. For instance when a baker bakes a loaf of bread the wheat he uses is an input but his labor (and the oven, his capital) do not get used up are factors of production. The price of a loaf of bread (a final good if I buy it) contains in it the cost of the wheat, the cost of the bakers labor, the interest he has to pay on the oven he bought with a loan and the profit the baker gets from owning the bakery (all payments to the factors of production).

.*** Presumably though scale inefficiencies are irreverent from a utility point of view since I must be on net gaining at least some utility from going through the trouble to bake my own bread (assuming I have the income to do it) instead of just buying it.

Econ 3023. Topics in Economic History: The American Century. T/TH 9:10-10:25

2011-08-19T09:27:00.009-04:00

Econ 3023. Topics in Economic History: The American Century.
T/TH 9:10-10:25
324 Milbank Hall

I am teaching this class with David Weiman. Materials for this class will be primarily posted on it's CourseWorks page.

Course Syllabus

Office Hours:
Lehman 006
T/TH 12:00 to 1:00

Texts:

FRBSF Economic Letter: Operation Twist and the Effect of Large Scale Asset Purchases.

Paul Treanor, "Neoliberalism: origins,theory, definitions."

Susan George. "A Short History of Neoliberalism"

To Think About:

http://voices.washingtonpost.com/ezra-klein/2010/04/why_do_harvard_kids_head_to_wa.html

http://baselinescenario.com/2010/05/04/why-do-harvard-kids-head-to-wall-street/

Econ 215: Money and Banking. Sunday, Fall 2011.

2011-08-18T15:01:00.014-04:00

The material posted here is for: Econ 215: Money and Banking Fall 2011; Sunday 1:00 - 4:00.

As you probably noticed there is a direct link to this post on the right hand side of the blog.
I can be reached at: andrew.a.bossie@gmail.com

Office Hours: Sunday 12:00 to 1:00 If I am not in the classroom (PH154) I will be in the adjunct office in the economics department: PH300B. I will also usually be available after class.

Syllabus

Readings/Texts/Etc:

For the first week of class: David Graeber on the Origins of Money.

Texts about the Financial Crisis

Median Income in NYC

Assignments:

Rules:

1. Must be handed in during class.

2. Must be stapled. Assignments not stapled will lose a letter grade

3. You must answer all questions. Failure to answer one question will result in a check minus. Failure to answer more than one question will result in a zero.

4. Rules for Emailing homework assignments (emergencies only)

a. Must be a single, legible pdf or word document.

b. Must be time stamped before the beginning of class on the day it is due.

Homework Assignment #1: Due 10/16
Homework Assignment #2: Due 10/30
Homework Assignment #3: Due 12/04
Homework Assignment #4: Due 12/11

Talking Points Alert: Lane Kenworthy's great graph about relative healthcare spending and outcomes.

2011-07-15T13:42:00.001-04:00

Via Brad DeLong. Link to the original article.

From Kenworthy:

Here’s a better way to compare. This chart shows trends in life expectancy by trends in health spending from 1970 to 2008:

On the Asymmetric Response to Inflation Data.

2011-07-15T10:06:00.002-04:00

Headline CPI has fallen by .2%. OMG! Its the Great Depression all over again! Sell all your gold! The Fed needs to print more money!

I expect to hear from John Cochrane today that we should raise taxes to avoid the clearly inevitable deflationary spiral about to grip the nation.

Noahpinion: The Libertarians and their classical theory of the business cycle

2011-06-01T22:59:00.003-04:00

Noah Smith likes Arnold Klings "PSST".

Thiis is apparently an old post by Smith, but it's something I've been thinking about a lot lately too. Like Noah, I too am looking for some new way of thinking about economics. Begrudgingly, I have to admit I kind of like PSST, though its more the intellectual tradition that the gentlemen over at EconLib.org appeal to that I have an affection for, not the need to find a way to insist that nature should be left to take it's course.

The reason I find PSST oddly appealing is because it is an attempt to revive a branch of economics that has been completely ignored by the dominant paradigm and even by many on the left side of the heterodox spectrum. The basic theory underpinning PSST--Ricardian comparative advantage--used to be the basis for a much wider discourse before it was forced into the ghetto of international trade theory. Murry Milgate draws a distinction that may not be well articulated among economists today:

...[I]n order to isolate Keynes's point of departure from orthodoxy, we will need to know from which economic theories the conventional wisdom was derived. As is well-known, Keynes did not help to clarify matters by grouping together under one heading "The Classical Economists", not only Ricardo, but also Marshall,. Edgeworth and Pigou (J.M.K. vol. VII. p. 3, n. I).[1]

Milgate goes on to draw a distinction between the "Classical Economists": Smith, Mathus, Ricardo and Marx and the "Marginalist" or neo-classical economics of Marshall , Walras and Pigou. The modern economist--of course--worships at the alter of the marginalists. Kling, who's denomination is prone to apostatize for the wrong reasons has touched a nerve for all of us who sit in the back pews.

Kling may be looking in the right place, but his world view dooms him to find the wrong answer. He wants PSST and comparative advantage to save the free market. The simple trade theory microeconomics of it dictate that everyone does what they are most efficient at doing and so there is no need to interfere. The intellectual tradition of Ricardo is not so one dimensional. The textbook model of comparative advantage is one that only has labor and a very simple, inert, returnless technology. Once you add profits to the classical model things get a little less... natural. Underlying the relations of capital and labor in the classical theory is a political economy. Unlike the Marginalists' idea that labor and capital get paid their market determined marginal products for the classical theorists power relationships determine the rate of profit and the wage rate. Notwithstanding the "natural" floor to the wage rate: Malthusian subsistence. Milgate quotes an Adam Smith Kling has probably never heard of: "though in disputes [over wages] with their workmen, masters must generally have the advantage, there is however a certain rate below which it seems impossible to reduce for any considerable time, the ordinary wage of the lowest species of labour."[2]

Oh man, now we are nowhere near where Professor Kling wants to be, now we are in Marxian territory. Marx comes out of the classical tradition and his theory of the business cycle in many ways is an attempt to fill in the distributional theory left by the earlier classicals. Marx takes for granted that there is no wiggle room in which workers and capital can share in the surplus but rather offers a law of pure subsistence wages ground in power relationships not Malthusian population swings.

The classical theory of capital also does not anchor capital in its marginal product or in a long term full employment. Employment is determined by the stock of capital but there is no mechanism that guarantees the full utilization of the capital stock will mean full employment. Murry Milgate's book, which I have quoted heavily from is actually part of a strain of intellectual inquiry that has tried to ground Keynes' insights in a tradition other than the Marginalist school, whose market mechanisms cannot abide by a truly Keynesian longterm under-employment. It is an intellectual movement touched off by Joan Robinson's simple challenge to the Marginalists of her generation to actually define what capital, the return to capital and the production function actually are. A question to which Samuelson et al could not come up with a satisfactory answer.

I'm way ahead of myself here. This is something I have only begun to explore myself. This being a more complex issue than just appealing to an undergraduate sense of comparative advantage I fully admit this will take some time to sort out. So let me slow down and propose a book club:

Robinson, Joan. The Production Function and the Theory of Capital. Review of Economic Studies Vol 21(2) 1953-1954

Walsh, Vivian and Harvey Gram Classical and Neoclassical Theories of General Equilibrium Oxford University Press, Oxford. 1980.

Sraffa. Piero. Production of Commodities by Means of Commodities. Cambridge University Press, Cambridge, 1960.

I'm calling it a book club because I have not fully digested these books though I do see the challenge to the marginalist orthodoxy which I feel has reached its natural conclusion in General Equilibrium models in which there is not even a difference between the long run and the short run. I don't think a return to the classicals is a panacea or should replace marginalist thinking entirely but I do think it is a legitimate way of looking at the economics we have all been taught from the outside. As well, while most economists seem to find indeterminacy terrifying I think the lack of a clear theory of distribution of income is kind of attractive in a post industrial world where labor does not share in productivity gains.

The Blogosphere is faster than I am.

So there are a couple of things I want to address. First, what modeling PSST means.

Arnold Kling:

Instead, I think that the right tools to use for macro are the two-country, two-good models of international trade. The "two countries" could be two sectors within an economy. The agricultural sector and the urban sector. The housing sector and the non-housing sector. And, of course, there are many more than two sectors. But just talking about two sectors is a big improvement over the GDP factory.

The problem here is that the two good two country model is absolutely not the right model for macro. I mean, if you want to enshrine an uber efficiency of markets then yeah two goods/two countries will work. Ignoring the question of what two goods and what two sectors, there is an additional sleight of hand here because if you try to model say three goods and three countries with Ricardian comparative advantage you get inefficient outcomes [3] though you can get around this problem to a degree by proposing an infinite continuum of goods [4]. This actually brings me to my next point. I disagree with Noah (and agree with Brad Delong--sort of--on this point) that you need an overly complex model to make this work. You can probably model fairly effectively with an infinite amount of "i"s and "j"s. Alternatively, a comparative advantage theory is not mutually exclusive with, say, sectors that produce C, G, I and EX. Actually, come to think of it, I would be fine with a two sector comparative advantage model if Kling would concede gains from trade between a government sector and a not-government sector.

Anyway, I want to stress that I'm not overly concerned with reasserting a supply side theory of the business cycle. The appeal of this classical line of thinking to me is that it gives us a different way of thinking about the distribution of output between capital and labor. As well, it is an alternative way of thinking about the dynamics of investment spending beyond it being a passive response to interest rates. And, the more modern direction of classical economics has been in the direction of trying to justify Keynes without the need for sticky wages and an inevitable return to a long run.

One more thing about Brad Delong's dismissal of PSST (which I largely agree with) in which he lumps in Marx and Hayek as liquidationists. He also does this in his excellent Seven Sects of Macroeconomic Error which is required reading now for my Macro 101 students. While I appreciate the rhetorical genius of it I feel like it obscures the important difference between the two. While both Marx and Hayek do assume that liquidation is inevitable, Hayek thinks it is desirable while Marx does not. For Hayek, the divine hand of the market will solve its own problems. Marx--in the classical tradition--recognizes that the solution to the problems of the market are political. Delong is right to point out essentially Marx goes too far in assuming there is no political solutions[5] besides revolution but it is still an important fundamental difference in the "models" of the two economists.

[1] Milgate, Murry (1982) Capital and Employment Academic Press, New York p36
[2] Milgate p37
[3] McKenzie, Lionel W (1954). Specialization and Efficiency in the World Production, Review of Economic Studies, 21(3)
[4]Dornbusch, R., S. Fischer, and P. A. Samuelson (1977). Comparative Advantage, Trade, Payments in a Ricardian Model with a Continuum of Goods, American Economic Review, 67(5)
[5] Since I'm doing footnotes anyway, here I'm thinking of the work of Acemoglu and Robinson who have a great "Marxian" model in which you don't have a revolution or even much political disruption before "the bosses" make concessions : Acemoglu, Daron and James A. Robinson (2000) Why Did the West Extend the Franchise? Democracy, Inequality and Growth in Historical Perspective, The Quarterly Journal of Economics 115(4).

How Long Did the Housing Bubble Go On For?

2011-05-26T22:28:00.005-04:00

Brad DeLong posts this on his blog:

Over the four-year period 2003-2006, annual construction spending rose to a level $150 billion above and then fell back to its long-run trend. Thus by the start of 2007 United States was overbuilt: about $300 billion had been spent building buildings in excess of the long-run trend.

When this construction was undertaken these buildings were expected to more than pay their way. But the profitability of these buildings depended on two shaky foundations: a permanent fall in long-term risky real interest rates, and permanent optimism about real estate as an asset class. Both these foundations collapsed.

By 2007, therefore, it would have been reasonable to expect that construction spending in United States would be depressed for some time to come. Since construction spending had run a cumulative amount of $300 billion ahead of trend, it would have to run $300 billion behind trend over a number of years in order to get back into balance. So everybody in 2007 was expecting a slowdown to be led by construction. But we were expecting a minor one: a fall in construction spending below trend of $150 billion a year for two years or $100 billion a year for three years or $75 billion a year for four years.

And starting in 2007 construction spending did indeed fall below trend. But we were expecting a minor one: a fall in construction spending below trend of $150 billion a year for two years or $100 billion a year for three years or $75 billion a year for four years. Instead, it fell $300 billion a year below trend. And it has so far stayed down for four years. And there is no prospect of rapid return to anything like normal levels.

Therefore when this construction cycle will have run its course, the United States will have first have spent an excess $300 billion, and then fallen short of trend by a cumulative $2 trillion of construction spending not undertaken. The net effect will be an at least $1.7 trillion construction shortfall in the United States: $1.7 trillion of houses, apartment buildings, offices, and stores not built.

He's basically describing this graph:

I don't know if I necessarily disagree with Professor DeLong, but I am curious about his trendline decision. He justifies it here:

Now let me briefly turn to construction. We expected a construction slump after the mid-2000s boom. Take construction spending in the United States as it stood back in 2001--when nobody thought we were overbuilding or overbuilt--and project it forward at the 3% growth rate of the American economy. We should probably project the construction trend at a slightly higher rate than that, because as people grow richer they do want to spend a greater share of their larger incomes on housing in a way that they don't for, say, food.

I'm not totally convinced by this. Post financial crisis "nobody thought" isn't very solid ground. So I looked at the longer annual real residential investment series:

I see basically three separate periods here. 69-81 looks like 2 business cycle driven very volatile periods with a little growth. After the 82 trough the expansion seems sustained a little longer and the fall off doesn't seem so steep. The red portion, which somewhat arbitrarily begins in 1992 is the beginning of an virtually uninterrupted climb in residential housing (even during the 2001 recession) that eventually became what everybody agrees was the housing bubble of the mid-2000s in which residential investment stays above the trend of the previous years until the collapse in 2006/7.

That chart reminds me of this chart:

Bubble run ups usually have a long period of above trend growth before you hit the "mania phase". In the case of housing, that's still above trend investment and is part of the overbuilding that still needs to be "corrected".

I think the case that the bubble had been a long time coming can be made. For instance, if we take 2003-2006 as the mania phase then it makes sense that this is the period where subprime mortgages arise. There are two stories people tell about subprime. The first is "chasing yield" story. That is, banks were lending to risky borrowers they said were safe but still paid high interest rates. The other story is that subprime was the last place to go because all the good borrowers had already taken out mortgages and refinanced etc. To the extent that the second story is true, how long did it take to make it all the way through the credit worthy borrowers? Did mortgage lenders become instantaneously aggressive in 2003 or was there a slow push of the supply curve of mortgages out further and further?

This brings me to the next argument in favor of my new pet theory. I'm a big subscriber to the "giant pool of money" theory of the housing bubble. However, I tend to date the capital inflow bonanza from the Asian Crisis of 1997. In the late 90s there was a sudden shift from capital flow "excess" into government deficits to "private deficits" (Private Savings - Investment < 0). Meanwhile, the current account balance continued it's historic decline. The dot com bubble, of course, is what everyone thought about and thinks about but a stock market bubble is not mutually exclusive with a housing bubble's infancy.

So whats the point? Well, I want to go back to Professor DeLong's idea that housing was only over built by $300billion and that we are "missing" $1.7trillion in residential investment that will eventually come roaring back. The increase in prices above the my trendline if measured from 1992 adds another $1.4trillion dollars to the overbuilding total. So if we think of the housing bubble as a generational phenomenon and not just a couple of years we had over $1.7 trillion in excess housing being built. The "correction" so far according to the 67-92 tread line is also much shallower, only about $425 billion. Suggesting we still have a long way to go before we come out even on residential housing.

NY State Property Tax Cap Deal.

2011-05-25T10:21:00.001-04:00

A property tax cap deal has apparently been made. From the NY Times:

The agreement, which would take effect next year, would limit the annual increase in the overall amount of property taxes collected by a local government or a school district. Property tax increases for individual homeowners could vary as properties are reassessed.

“This issue is probably the most powerful and pervasive issue across this state,” the governor said at an appearance with legislative leaders on Tuesday. “People in New York City don’t feel it, but I can’t tell you how many times somebody has come up to me and said, ‘You have to do something about property taxes; I just can’t afford to stay in my home anymore.’ ”
...

Forty-three other states have some limits on property taxes. But New York is unusual because property taxes are the main source of support for schools outside of New York City. In the city, the schools are primarily financed by a municipal income tax.

At a talk I went to with The Fiscal Policy Institute's Frank Mauro he pointed out that the property tax cap is attractive politically because the Governor can be seen as taking on the issue of property tax relief without actually doing anything (i.e. spending money). Here is an except from Mauro's testimony before the state Assembly:

Despite the “tax reform” roots of the current property tax debate, tax reform options are currently receiving insufficient attention as many of the state’s business elites promote the inherently flawed idea of a “one size fits all” cap that by its very nature implies that the current distribution of resources among the state’s school districts is just fine and that they should all move in lockstep from where they are now.

But the tax cap solution is even worse than that since the proposed caps do not include any
requirement that the state uphold its end of the bargain for financing a reasonable portion of the
costs of education or of basic municipal services. And the 2005 cap on the counties’ Medicaid
costs misses the major mismatch – that some counties have much greater than average numbers
of needy families relative to their property tax bases. Taxable property values are not by some
magic distributed among school districts in the same proportions as students or student needs;
nor are taxable property values distributed among cities, towns and villages in the same
proportions as are their responsibilities for providing basic municipal services.

This means that without sufficient state aid distributed on a basis that takes service
responsibilities and ability to pay into consideration, the pressure on the property tax is going to
be much greater, on average, in some communities than in others. The reason that I say “on
average” is that even if New York State were to deal effectively with the fiscal disparities that
exist among its local governments (and it certainly should do so), there will still be hundreds of
thousands of households who, through no fault of their own, are facing property tax bills that
represent inordinate portions of their incomes. This includes, for example, workers who have lost their jobs as well as long time residents whose homes have increased in value much more than their incomes. For these households, the only affordable and effective solution is a circuit
breaker that targets relief to those who are most overburdened by property taxes.

The 2007 statewide solution to the Campaign for Fiscal Equity litigation provides an example of
an effective strategy for addressing fiscal disparities among local jurisdictions but it also
demonstrates why an individually targeted circuit breaker is an essential element of an effective
overall strategy. The plan that the Governor and the Legislature agreed on in 2007 was based on
two essential premises: First, that all children in the state are entitled to a sound basic education
whether they live in a school district with $150,000 of taxable full value per pupil or in a school
district with $1.6 million of taxable full value per pupil. And second, that the tax effort that can
be expected from low income New Yorkers is much less than the effort that can be expected
from high income New Yorkers. We need a school finance system that is fair to the state’s tax
paying households and that is fair to the state’s school pupils. The 2007 school finance reform
plan recognizes that some communities can contribute much more on average to the cost of a
sound basic education than can others but even among communities with very high incomes on
average (and among communities with appropriately low full value tax rates) there are
households whose property tax bills represent unacceptably large percentages of their income.
These are the people who are being forced out of their homes by property taxes; and the only
affordable and effective way to assist them is through a targeted circuit breaker. A “one size fits
all” cap on the growth of school district tax levies will not address their situation but it will have
very negative consequences for the concomitant need to reduce fiscal disparities among school
districts while ensuring that all the state’s school children have access to a sound basic
education.

The property tax problem has been caused because local taxes are as far downhill as taxes can flow. Federal and state tax and spending cuts have meant the burden has been shifted to localities. In New York state in particular this has lead to a deep division in the quality of education across the state. Rich municipalities have good schools because they can afford them and poor school districts do what they can. Of course, a Mauro suggests a 2% property tax cap is going to put even the better schools in jeopardy. Compoundingly

Brad DeLong points us to Dan Kuehn who points us to DARPA

2011-05-20T13:42:00.004-04:00

Brad DeLong:

Dan Kuehn points us to DARPA:
Facts & other stubborn things: The Defense Advanced Research Projects Agency (DARPA) has initiated a study to inspire the first steps in the next era of space exploration—a journey between the stars. Neither the vagaries of the modern fiscal cycle, nor net-present-value calculations over reasonably foreseeable futures, have lent themselves to the kinds of century-long patronage and persistence needed to definitively transform mankind into a space-faring species.... We are seeking ideas for an organization, business model and approach appropriate for a self-sustaining investment vehicle. The respondent must focus on flexible yet robust mechanisms by which an endowment can be created and sustained, wholly devoid of government subsidy or control, and by which worthwhile undertakings—in the sciences, engineering, humanities, or the arts—may be awarded in pursuit of the vision of interstellar flight...
I kinda think this problem has already been solved: all you need to do is draw the corporate charter to insulate the corporation's decisions from speculative short-termism, and you are there.

I disagree with Prof. DeLong, I dont think it can be solved (Kuehn seems to agree with me). Here is Keynes (General Theory; Ch12) on why the problem is deeper than corporate structure:

Investment based on genuine long-term expectation is so difficult to-day as to be scarcely practicable. He who attempts it must surely lead much more laborious days and run greater risks than he who tries to guess better than the crowd how the crowd will behave; and, given equal intelligence, he may make more disastrous mistakes. There is no clear evidence from experience that the investment policy which is socially advantageous coincides with that which is most profitable. It needs more intelligence to defeat the forces of time and our ignorance of the future than to beat the gun.

It is particularly heart breaking--though not unsurprising--that this is the direction DARPA is so explicitly moving in. It was the public/private/academic long term goal oriented partnerships fostered by DARPA that... well... gave us virtually everything that has made this blog possible (except the transistor,which was developed by another unique mid-20th century institution).

I have an underdeveloped theory about this. My argument essentially runs that there is a class of "public goods" that the market either cannot deliver as efficiently as possible or even at all because they are "outcome" (or quantity) goods and not "price" goods. That is, they are things that are goals that have to be met irrespective of price or rather that their social benefits outweigh their private benefits (ala Keynes).

The development of the computer was only made possible because both the Census Bureau and the military were "outcome" oriented organizations (with relatively deep pockets) that were willing to finance failures. Had were relied on the "price" (rate of return) mechanism in a world of uncertainty it seems highly unlikely that any one private firm would have thought it worth it's while. In fact, the poster child of the mid-century computer IBM essentially only picked up the computer in any real way after it had been proven profitable and IBM's success with the computer had more to do with the way it the marketed and combined the various aspect of the computer than anything else.

I also think medical care and higher education fall into this class of "outcome" goods, but their problems are demand side problems and not supply side problems like the one DARPA seems no longer willing to help solve.

Mike Konzcal again and something else that came up in class.

2011-05-18T20:48:00.002-04:00

Here is the whole post. Its a story about HUD (Housing and Urban Development) being one of the few federal government organs who actually give a shit about the law. it may be not that interesting but I just want to highlight one paragraph:

In this dark, cynical period, I’m actually shocked how refreshing I find this. Here’s a simple request: when it comes to making sure the financial sector isn’t running out of control over trust and mortgage law and making a mockery of the foreclosure process (and destroying the economy in the process), can we get less Ivy League supermeritocrats and more people associated with the “International Association of Chiefs of Police” and the “Bureau of Engraving and Printing”?

I wasted another opportunity in class on Tuesday (the other one is here). I didn't want to waste a lot of time pontificating becuase thats not what you guys care about right now, but for a moment we talked about what you have to do to get a job at Goldman Sachs and I said the answer was simple: Graduate with a 4.0 GPA at Harvard.

There is something deeply wrong with this system, though. These "supermeritocrats" as Mike puts it do essentially control the country, but they do it for their own benefit. A friend of mine who works in the city's budget office has a slightly different take on the supermeritocrats. He works with a lot of Ivy League types and his biggest complaint is something I've found both disturbing and oddly gratifying. To quote: "They aren't exactly independent thinkers."

Talking Points Alert: Mike Konczal/David Min and the "Zombie Idea" that Fannie and Freddie caused the housing crisis.

2011-05-18T17:16:00.004-04:00

This is a great summary from Mike Konczal at Rortybomb of the faulty reasoning used to claim F&F were responsible for the housing crisis.

I was asked to be more balanced in class, but instead I'm going to post a really good take down of one of the "other sides" golden calves. I'll also sort of missed an opportunity to expand on my philosophy about this. I know some of you in class disagree with me and that is 100% fine. However, I do not view it as my job to be impartial or objective, I view it as my job to be honest. I have been upfront about which way my views slant and that the extent to what I feel like I should do. I feel we live in a world where acting like you are "objective" is just a dishonest rhetorical device and that most of the reason you will be graduating into a miserable job market is because a whole bunch of people "objectively" said housing prices can increase forever.

Anyway, here's Mike...

But first, as always, Wallison brings out the same argument that blames the crisis on Fannie and Freddie that he’s been using since 2009. Introduction (my bold):

[G]overnment housing policies…fostered the creation of an unprecedented number of subprime and otherwise risky loans immediately before the financial crisis began….In March 2010, Edward Pinto, a resident fellow (and my colleague) at the American Enterprise Institute who had served as chief credit officer at Fannie Mae, sent the Commission a 70-page, fully sourced memorandum on the number of subprime and other high-risk mortgages in the financial system in 2008. Pinto’s research showed that he had found more than 25 million such mortgages (his later work showed that there were approximately 27 million). Since there are about 55 million mortgages in the U.S., Pinto’s research indicated that, as the financial crisis began, half of all U.S. mortgages were of inferior quality and liable to default when housing prices were no longer rising.
This usually leads to the conservative talking point: half of all subprime and other high-risk mortgages were held by the GSEs! But wait, what’s that “and other high-risk mortgages” doing there?

This zombie argument finally got fully dismembered by Center for American Progress’ David Min in his recent report taking apart Wallison’s FCIC dissent, Faulty Conclusions Based on Shoddy Foundations.

Wallison and Pinto claim that the GSEs were responsible for half of all subprime and subprime-like mortgages. They do this by making up a confusing definition of “subprime-like,” what above is mentioned as their “and other high-risk” mortgages.

The fun part of making up your own definition is that it can be whatever you want it to be. If we define a conventional loan made to a borrower with a FICO credit score between 620 and 660 as a “leprechaun” and a loan with a cash down payment of less than 10 percent as a “unicorn,” we can say that Fannie and Freddie was responsible for half of all leprechauns and unicorns under oath and while serving on the FCIC.

Now instead of a leprechaun they’ve created the definition of “subprime by characteristic” and instead of a unicorn they say “Alt-A by characteristic,” for the numbers mentioned above. This is a definition nobody in the financial markets use.

The three-card monte trick is pretty straightforward once you know where to watch. There’s a lot of statements that go: “Fannie and Freddie made a lot of subprime loans and other high-risk mortgages. And subprime loans had a 25% default rate!” And you naturally assume that the other high-risk loans must also have a gigantic default rate compared to regular mortgages. Except they don’t. From Min’s paper (p. 8):

That 8.45% and 10% are the “other high-risk loans” that they try and shoe-horn in with subprime. That’s a high default rate, but it’s nowhere near as scary as the nearly 7% default rate on regular mortgage loans. And this trick is even more apparent when you break it down by securitization (see below). These so-called high-risk loans are much closer to regular loans when it comes to defaults, which are high across the board given the housing bubble and subsequent recession and high unemployment.

Min’s document goes through the rest of their claims related to the CRA and securitization as well.

Wage Growth Targeting.

2011-05-16T17:44:00.004-04:00

Mike Konczal at Rortybomb talks about a Makiw and Reis paper that came to his attention through a post made by Matt Rognile at mattrognile.com. I've been thinking a lot about inflation recently becuase I've been reading about the late 60s/70 recently and there was a flare up over inflation targeting in the blogosphere after Bernanke's press conference. Matt posts a lot about inflation that I disagree with, but it's definitely to his credit that disagreeing with him means whipping out google scholar.

Anyway, the thing from the paper Mike picks up:

Mankiw writes about his ideal target using that criterion and brought up an interesting historical story:

Our results suggest that a central bank that wants to achieve maximum stability of economic activity should give substantial weight to the growth in nominal wages when monitoring inﬂation…

An example of this phenomenon occurred in the United States during the second half of the 1990s. Here are the U.S. inﬂation rates as measured by the consumer price index and an index of compensation per hour:
1995 2.8 2.1
1996 2.9 3.1
1997 2.3 3.0
1998 1.5 5.4
1999 2.2 4.4
2000 3.3 6.3
2001 2.8 5.8

Consider how a monetary policymaker in 1998 would have reacted to these data. Under conventional inﬂation targeting, inﬂation would have seemed very much in control, as the CPI inﬂation rate of 1.5 percent was the lowest in many years. By contrast, a policymaker trying to target a stability price index would have observed accelerating wage inﬂation. He would have reacted by slowing money growth and raising interest rates (a policy move that in fact occurred two years later). Would such attention to a stability price index have restrained the exuberance of the 1990s boom and avoided the recession that began the next decade? There is no way to know for sure, but the hypothesis is intriguing.

It’s things like this that make me worried about being creative with inflation targeting. No notable inflation in the economy and the only period of sustained wage growth in my lifetime – better get the central bank to choke that off immediately. Can some Republican officially propose “price stability and minimal wage growth” as the new dual mandate for the Fed?

First Mike already kind of makes this point but in the Mankiw and Ries paper they say that the central bank in their model targets inflation, so it's sort of confused to then present the example above as a way in which their model suggests central banks can smooth output. Second, the evidence is mixed at best (here is a short paper by Hess and Schwietzer at the Chicago Fed) that wage increase cause price increase and not the other way around. So, while the theory may point to wage targeting does it even make a difference in practice? .

For me, it comes down to the idea of who enjoys the fruits of productivity gains in the real world. It is conventional wisdom (that may be wrong!) that wages have not been keeping up with productivity gains over the last 30 or 40 years. In fact, the late 90s were one of the few periods where there was a chance for labor to "catch up" because unemployment was so low. Price inflation targeting--while not my favorite way to do monetary policy--at least forces (ideally) both capital and labor to "share the pain" with wage growth it seems to be you would just be capping wages without capping profits.

I mean, it seems like the market has been doing this anyway but it's not quite clear what you get from enshrining that as policy.

The Final Exam Scheduling Problem.

2011-05-10T15:50:00.002-04:00

Queens College has scheduled several finals on the same day and time. I have to come to Queens n both May 19th and May 24th. Both days I have exams scheduled from 8:30 to 10:30. I will allow students to take their exam on either day if they have a legitimate scheduling conflict.

If you need to switch, you must EMAIL ME BY MAY 17th. You must include in the subject line which class of mine you are in. You must also provide in the body of the email your name and the following information about the class that is conflicting with mine: class name (i.e. Economics 101: Macroeconomics), time, and instructor of the class.

Students not following the above instructions will not be allowed to take the exam on the "wrong" day.

Inflation in the 70s links.

2011-05-09T12:33:00.002-04:00

I'm prepping for a 20th Century US history class and I came across these links that ill need sooner or later:

http://delong.typepad.com/sdj/2008/09/note-to-self-in.html

http://delong.typepad.com/sdj/2007/04/what_caused_the.html

Isn't Ben Bernanke what the New Keynesians want?

2011-05-06T07:51:00.006-04:00

Paul Krugman made me think of one thing that has always bothered me about New Keynesian economics when he said that Bernanke is being intimidated by inflation hawks the other day. The idea of the conservative central banker.

I have never really liked the claim that you need an overly conservative central banker to maximize social welfare because your normal run of the mill central banker will over inflate. This always bothered me. There always seemed to me to be a fair amount of intellectual path dependence to that finding in the 1999 "Science of Monetary Policy" paper. I'm just not sure how you come to that conclusion without looking for it. Like, it seemed to me the New Keynesians were looking to prove the ad hoc finding that you need a central banker who's DNA tells him to keep inflation low.

Speculation on the history of economic thought aside, I never really understood that proposition in a general equilibrium model. I mean, I know the math works, but I can't help but feel like in a perfectly rational world of perfectly rational agents the perfectly rational central banker will figure out the optimal way to manage inflation. For instance, Ben Bernanke has probably seen and can probably solve the equation that tells him to be overly conservative and he can act on it, whether or not he was beaten with the inflation stick when he was a boy.

Of course, that's the problem. There is a clear penalty for not being conservative but no clear penalty for being too conservative. That's a serious asymmetry and I don't think Ben Bernanke is being forced to do anything, listening to the hawks is welfare maximizing.

A Breif History of the Fed and the Financial Crisis Part II: QE I and II

2011-05-04T12:02:00.017-04:00

Here is Part I.

This post I'm going to talk about Quantitative Easing, which the Fed pursued with two different programs over the course of the last 2 1/2 years.

Quantitative Easing 1 (QEI):

Here are two other useful timelines that were written when the second round of quantitative easing (QEII) was expected:

Calculated Risk: A QE1 Timeline
WeeklyBasis: Quantitative Easing 101

Now, the model we use in class of the fed funds market predicts that once the Fed is on the flat part of the reserve demand curve (i.e. at the rate where the Fed pays interest on reserves) there is nothing left for the fed to do vis-1a-vis interest rates. If the Fed did not pay interest on reserves then the "floor" on the Fed funds rate would be at 0% because no bank will loan money at a rate lower than zero ( a negative interest rate) because then you are paying someone to borrow from you. In either case this is know as the "liquidity trap". By December of 2008 the Fed was fully "caught" in the liquidity trap.

The Fed however was not necessarily out of bullets. I'm going to repeat figure 1 from part 1:

Figure 1 (from part 1)

Again, you will notice that the fed funds rate has a very direct effect on short term rates but less of an obvious or direct effect on longer rates. Since there was clearly a problem brewing in the mortgage/housing industry the Fed set about trying to solve the problem directly. In November of 2008 the Fed announced that it would buy $600 billion in "agency backed" (top of the line?) mortgages starting in January of 2009. As the WeekBasis post above points out, before the fed bought any mortgages mortgages rates dropped by 1% in anticipation of the purchase.

Figure 2

Figure 2 shows the interest on prime mortgages. There is a very clear decline in the interest rates of mortgages. There was also a very clear decline in AAA corporate bonds and 10 year treasury bonds which are close subsitutes for mortgages (important for QEII).

It's important to understand what is going on here. The Fed is simply preforming open market purchases--which means increasing the money supply--but instead of buyin short term treasury bonds the fed is simply buying longer terms private instruments. That is to say, there is (literally) no law that says that the Fed's only focus should be on the single fed funds interest rate. Since the fed funds rate had essentially become useless as an instrument of monetary policy the Fed went directly to the source of the problem and changed mortgages rates directly. It bought down mortgages rates in an attempt to make it cheaper and easier for people to buy and/or (probably more importantly) refinance their homes.

In March the Fed announced the would purchase a total of $1.2 trillion in "agency backed" (guaranteed by Fannie and Freddie) mortgages.

QEII

The Fed had finished its mortgages purchases by March 2010. In late August Bernanke started talking about a second round of quantitative easing. In early November the Fed officially announced that it would purchase another $600 billion ($75 a month) in securities. However, QEII is slightly different that QEI. While QEI was a direct purchase of mortgages QEII is a program to purchase 10-year treasury bonds. Why? Well, the interest rate on 30-year mortgages is actually based on 10-year treasury bonds. The average mortgages is held for 10 years so fixed rate "conforming" mortgages rates are based on the 10-year treasury rate with a risk premium. That is why they track so closely to the 10-year treasury bond in figure 2.

However, it looks at least from the above graph that QEII has not had the kind of pronounced effect as QEI, at least not on mortgage rates. If anything it looks like the expectation of QEII was most of its effect. Mortgages rates went slightly lower at the end of 2010. However, the QEII effect may also be beyond an interest rate decrease. The Fed forcasting that it QEII will create 700k jobs. It is after all still increasing the money supply.

QEII is expected to end (without a commitment of more money by the Fed) in June of this year.

The Devil is in the Deflator.

2011-05-03T17:35:00.011-04:00

At Econospeak Barkley Rosser brings up WWII:

This curiously relates to a matter that has been much argued about previously on various blogs, namely the nature of the short and sharp post-WW-I recession of 1919-20. Some have argued that this shows how wrong Keynes was, because laissez-faire was followed, including letting prices (and some wages) fall sharply in 1921, with the economy bouncing back very nicely, after having the unemployment rate soar from 5% in 1920 to 9% in 1921. Most economic historians have attributed this recession to "postwar adjustment problems."

OTOH, some of those making a big fuss about that recession somehow fail to notice that in fact there was a post-WW-II recession, if also very brief, if sharp. It occurred in 1945 with the sharpest decline in wartime spending, although not much remembered. However, the official stats have US declining in GDP by a whopping -12.7% in that year, although that number must be taken with some grains of salt due to all kinds of measurement issues and restructurings. Some say this exaggerates things as the unemployment rate only went from 1.5% to about 3.6%, a rise, but not all that much to get worked up about.

Two points. The first is that this latter event does not account for the massive decline in female labor force participation that occurred in 1945, from about 38% to about 30%. We all know (or should) that those withdrawing from the labor force do not count in the unemployment rate. That not very large increase in the UR does not disprove that there was a sharp (if short) decline in GDP. (Rosie the Riveter went home to boom out those babies, and to buy houses to be built, given that basically none had been for about 15 years in the US).

The second point I'm not going to deal with, it is about the Federal Reserve and interest rates after the war. The point above though I'm more than happy to write about. While I do believe Prof. Rosser is mistaken, those that are challenging him in his comments section are right for the wrong reason.

Robert Higgs was mentioned about a dozen times as providing the basis for the idea that there was no post war recession. However, that claim is somewhat dubious, thought I'm perfectly happy to accept it. Higgs starts from the presumption that all government spending is useless and wasteful and with that eliminates the decline in government spending from consideration when he declares that there was no post war recession. Essentially Higgs' argument revolves around assuming that "legitimate" or "welfare enhancing" GDP = C + I + NX. What Higgs focuses on is the extraordinary jump in investment in 1946 (the end of war spending shows up in NIPA data in 1946, not 1945) which is actually quite remarkable and which Higgs attributes to the "pro-businesst" policies of the new Truman Administration and the general go-gettingness of the supply side.

The conclusion you reach about the depth of the recession when using NIPA data--as Higgs does--depends very heavily on which deflator you choose to use. A cottage industry has sprung up around producing WWII deflators:

Table 1 shows real GDP and real GDP growth given a bunch of different deflators:

As you can see, this is totally unsatisfying. The F&S deflator (based on the Kuznets deflator) is Higgs' preferred deflator. The M&R (Mills and Rogoff) and V&G (Vedder and Galloway) deflators are variations on the F&S deflator. The F&S deflator tends to be the one people use because of its source and it's elegance/simplicity. However, the F&S deflator's main purpose (like most of the seminal work of Friedman and Schwartz) is to prove the thesis that only the money supply matters. It takes as its primary assumption that the price controls of the war had no effect at all and that all natural price increases induced by the war found their way into quality deterioration, the annoyance of scarcity or black market activity. These hidden price increases, F&S assert can be measured directly by the increase in the money supply during the war.

The Rockoff deflator on the other hand has more of a micro-basis that looks at primary documents of the Office of Price Administration among other things. Hugh Rockoff's deflator is less elegant, as he admits. However it takes into account the fact that only about 30% of people were aware of "black market" (defined broadly) activity during the war as Rockoff points out in _Drastic Measures_. This both overstates and understates the extent to which prices "increased" despite price controls but it does give some idea to the extent to which prices probably did not adjusted as perfectly as the F&S deflator would have it.

So one is left with NIPA estimates (these are taken from the Historical Statistics of the US) that suggest either no recession at all or a very deep decline in real GDP of 9% over two years. I would also like to point out as well that while there may have been a 8% decline in labor force participation by women, the economy also had to absorb (over the 1945-1946) the return of about 10 million men back into the labor force (very crudely: about 12% of the labor force) over these two years. That gets us further away from any clear picture of a post war recession.

But I am not agnostic on the effect of government spending after the war. We can start from the "Hayekian" assumption that there was no business cycle downturn after the war which I am quite comfortable with. This, however, does not disprove that there was no Keynesian effect at work. One of Prof. Higgs' most important insights is that savings was not "spent down" after the war as the traditional Keyensian story tells and that is much of his basis for declaring a supply side explanation to the post war boom . However, the demand side story holds up if one thinks of that pool of savings as the basis for the financing that allowed returning G.I. an his new bride Rosie the Riveter to fill up there new house with the durable goods that the war spending had crowded out and much more importantly that pool of savings provided those new families with the financing to buy the house they bought and needed to fill with modern conveniences.

Another way of putting this that is more in line with the point Rosser is making is that Keynesian theory does not dictated an endless stream of government spending to prop up the economy. One can think of the post-war boom as a delayed multiplier effect. War production crowded out the production of durable goods (most importantly housing and cars) but increased incomes (though, yes, nominal disposable incomes did "stagnate" from 1942-1945 after a 30% increase between 1939 and 1942). These increased incomes became savings without the normal platter of goods available. That savings became goods after the war when the swelled balance sheets of financial institutions looked for new assets to replace wartime assets.

In fact, WWII as a "Keynesian Event" is unique in how dramatically it parses out the effect of government spending increases and then the secondary multiplier effect that provides the autonomous engine of growth that Keynes clearly saw as being at the heart of the capitalist system, the debate over the preface to German edition of _The General Theory_ aside.

Final Exam Schedule

2011-05-02T14:17:00.003-04:00

Queens College finally released schedule for final exams.

Econ215 (Money and Banking):
Thursday May 19, 8:30-10:30

Econ101 (Macro):
Tuesday May 24, 8:30-10:30

Evaluation Season.

2011-05-02T13:20:00.003-04:00

I would appreciate it if you guys would fill out the student evaluations on the QC website. The response rate is very very low. I do take them seriously but its impossible to get a good sense of whats going on with such a low response rate. It looks like you get $15 in free printing if you fill out the evaluations.

Queens College evaluations.

My page on Rate My Professor.

Gold Prices VS CPI 2000-2011

2011-04-15T12:38:00.001-04:00

A Breif History of the Fed and the Financial Crisis Part I: The Federal Funds Market and the Alphabet Soup of Programs.

2011-04-14T13:07:00.023-04:00

Lets start out by establishing what it is the Fed actually does. It is a kind of short hand for commentators to say "The Fed is lowering/raising interest rates". More careful reporters and commentators will call the federal funds (fed funds) rate what it is or call it a policy rate.

Anyway, Figure 1 shows the relationship between the fed funds rate and a couple other rates.

Figure 1: Fed Funds and Selected Rates

Figure 1 should give you an idea of the kind of effect the federal funds rate has on "interest rates" over all. It is obvious that the rate on 3-month treasury bonds tracks the fed funds rates very closely. As well, the "prime rate"--the rate at which large banks lend to their best customers-- tracks the fed funds rate very closely but has a very clear risk/liquidity premium.

The effect of the fed funds rate is less obvious for the other rates. There seems to be a general pull downwards on 10-year yields, AAA bonds, and mortgages at least until the financial meltdown. You'll also notice that these three things move together pretty closely. That will be more important in part II.

Figure2: The Federal Funds Market

Here we have the federal funds market during the 21st century. The Federal funds rate being graphed here is the effective federal Funds rate not the target rate. You can get a pretty clear idea of what the target rate is from the effective rate. However we have also a little bit of added information. Notice the two big downward spikes. The first is at the very beginning of the graph (Jan 1, 2000) and the other is around the end of the year in 2001 (9/11/2001 to be exact).

Those two spikes represent huge injections of reserves into the fed funds market. The first was an intervention by the Fed to help prevent problems from the Y2K bug that never materialized. The other is of course in response to the massive disruption to the financial system when lower Manhattan was shut down for several days.

Figure 2 also tells the story of the Federal Reserve's role in the Financial crisis. We see a very, very sharp drop in the Federal Funds rate in 2001. In January of 2001 the Fed cut the fed funds rate from 6% to 5.50%. By the end of 2001 the rate was 1.25%. In Nov 2002 the Fed cut the rate all the way down to .75%. In 2003 the Fed raised rates to 2% and then keeps rates at that level until mid 2004 when it gradually starts (best illustrated by the step pattern in the discount rate) to increase interest rates to a peak of 6.25% in mid 2006.

Those low rates from 2001 to mid 2004 along with the quantity of reserves needed to keep rates that low many people say is a big part of the creation of the housing bubble. Initially, of course, the low rates were intended to juice the economy during the 2001 recession but critics say the Fed kept rates down too long.

I'm actually somewhat agnostic about the Fed's role. They must have had something to do with the housing bubble, but I'm not sure low rates were a sufficient condition. The giant increase in global savings during this period (it basically doubled)--as far as I'm concerned--is the central player in the housing bubble. Maybe we can think of the Fed as the yeast and the global savings glut as the flour. You can make bread without yeast, but it' won't rise. Of course, there are like a million other ways to blame the Fed beyond interest rate policy, such as thier role as a regulator and their refusal to use their ability to jawbone markets.

Also included this graph is the discount rate which, as we discussed in class is supposed to be a kind of "cap" on the federal funds rate. You'll notice several upward spikes. Lets zoom in a little bit:

Figure 3: Fed Funds Market Jan 2007 to March 2011

In late 2008 there are two significant spikes above the discount rate. This is indicative of the beginning of a financial panic. Banks are all scrambling to increase their excess reserves either "just in case" or because they legitimately need them. However some financial institutions may not have wanted to seem as though they needed discount loans and so borrowed at a rate above the discount rate from other banks, not the Fed. The expansion of discount loans through 2008 like the expansion of the fed balance sheet in general is really remarkable. The Fed had already increased its discount loans by about 1800% through 2007, from 27 million to $48.7 billion. From the 4th quarter of 2007 to its peak in 2009q1 the Fed increased the borrowed monetary base to $536.3 billion, an over 100% increase. All told, of course, the Fed increased its direct lending to the financial system by 20,000%!

This is a good place to talk about some of the unprecedented things the Fed did to try to stem the financial panic. It is important to point out that much of the lending the Fed did was not necessarily about maintain the target fed funds rate but was rather the fed fulfilling it's role as "lender of last resort". Credit markets in a financial panic seize up and banks and other financial institutions find it difficult or impossible to find funding. The Fed then steps in to make sure financial institutions can stay afloat. As well, the Fed greases the wheels of the financial system to get it running again.

A portion of the increase in discount loans I'm talking about were not loans to banks per se but were rather loans to money market mutual funds through banks. The Fed instituted a loan program (AMLF) in which they loaned money to banks so that they could buy commercial paper (corporate bills) from these mutual funds. This was intended to keep the commercial paper market operating in a time when no one wanted to loan money to anyone (especially financial companies) .

Not reflected in the loans above were a variety of programs such as the Term Auction Liquidity Facility or TALF. TALF loans were loans in which the collateral is an AAA rated asset backed securities (ABS). ABS of course tipped off the crisis through mortgage backed securities, but the ABS market is much bigger than just mortgages. ABSes finance credit cards, student loans, car loans and other things. Asset backed securities are fundamental to the "shadow banking system" the segment of the financial system that does many of the things banks do (make loans) but aren't actually banks. This market was also in a state of panic which was the justification for the TALF. Related (and a much bigger program) was the Commercial Paper Funding Facility (CPFF) which was similar to AMLF, but much much bigger.

Finally, there are the Maiden Lane programs (I, II and III). Essentially, these are "shell" companies the Fed created in order to buy assets from Bear Sterns and AIG. The Fed bought some of the uglier holdings of Bear Sterns to make the sale to JP Morgan Chase more attractive (Maiden Lane I) and the Fed bought a bunch of AIG's Mortgage Back Securities (MBS) in order to give AIG the cash needed to meet their obligations (Maiden Lane II). This was over and above the $85 billion line of credit the Fed set up for AIG. Finally, Maiden Lane III was another LLC set up by the Fed (partially owned by AIG). Maiden Lane III was created to buy up the Collateralized Debt Obligations (CDO) that several banks had take out insurance policies (Credit Default Swaps, or CDOs) on. As the value of the CDOs fell, AIG was obligated to pay these banks the difference between the market value of the CDOs and "par" (what the banks paid for them) value. AIG had already paid about $35 billion (mostly out of the $85 billion the Fed had lent them), the purchase of the CDOs from the banks by the Fed made up another $29 billion or so.

Now during 2008 the Fed isn't only making loans. The Fed is also rapidly slashing the federal funds rate. The Fed had begun cutting interest rates in September of 2007 (from it's peak of 5.25%), in response to what became the recession that started in December of 2007. Just real quick: I want to point out that the financial crisis was the result of the recession not it's cause, though it certainly made the recession worse. Anyway, in January of 2008 the Fed took the dramatic step of cutting the fed funds rate by .75%, there were several other cuts from January to March but on March 18th in the wake of the Bear Sterns collapse the Fed made another dramatic cut of 75 basis points off the fed funds rate. Long story short, from September 2007 to December 2008 the Fed cut the fed funds rate from 5.25% to a "target" of 0 to 25 basis points.

About this this target of 0 to 25 basis points: Importantly missing from Figure 2 is the interest rate the fed pays on deposits by banks at the Fed. When first instituted in October of 2008 the Fed made a distinction between what it would pay for required reserves and for excess reserves but later started paying 25 basis points on all reserves. Now, it may not be obvious from figure 3, but the fed funds rate has actually been below 25 basis points (roughly speaking around 15 basis points). Using the model of the market for reserves in class we came to the conclusion that no one would lend at less than 25 basis points. However, in the real fed funds market there are non-banks that buy and sell reserves (most notably Fannie Mae and Freddie Mac). These non-banks do not have deposits at the Fed though they make overnight loans and they are apparently willing to lend reserves at around 15 basis points.

I'm going to break this post up into two posts:

Part II: Quantitative easing.

Talking Points Alert: Dean Baker on Rep Ryan's proposed Medicare butchering..

2011-04-06T14:18:00.008-04:00

Hey, finally I have an idea for a catchy feature. I'll post "Talking Point's Alerts" (TPAs) when someone posts a really well condensed or compelling summary of an issue. This way I have a good index of solid points and compelling number crunching that everyone can brush up on before Thanksgiving dinner, during an argument on a message board or before an appearance on Meet the Press.

The inaugural TPA: Dean Baker on shifting the burden of healthcare onto individual seniors (Here is the CBO Letter to Paul Ryan)

Representative Ryan Proposes Medicare Plan Under Which Seniors Would Pay Most of Their Income for Health Care

Wednesday, 06 April 2011 04:42

That is what headlines would look like if the United States had an independent press. After all, this is one of the main take aways of the Congressional Budget Office's (CBO) analysis of the plan proposed by Representative Paul Ryan, the Republican chairman of the House Budget Committee. Representative Ryan would replace the current Medicare program with a voucher for people who turn age 65 in 2022 and later. This voucher would be worth $8,000 in for someone turning age 65 in that year. It would rise in step with with the consumer price index and also as people age. (Health care expenses are higher for people age 75 than age 65.)

According to the CBO analysis the benefit would cover 32 percent of the cost of a health insurance package equivalent to the current Medicare benefit (Figure 1). This means that the beneficiary would pay 68 percent of the cost of this package. Using the CBO assumption of 2.5 percent annual inflation, the voucher would have grown to $9,750 by 2030. This means that a Medicare type plan for someone age 65 would be $30,460 under Representative Ryan's plan, leaving seniors with a bill of $20,700. (This does not count various out of pocket medical expenditures not covered by Medicare.)

According to the Social Security trustees, the benefit for a medium wage earner who first starts collecting benefits at age 65 in 2030 would be $32,200. (This adjusts the benefit projected by the Social Security trustees [$19,652 in 2010 dollars] for the 2.5 percent annual inflation rate assumed by CBO.) For close to 70 percent of seniors, Social Security is more than half of their retirement income. Most seniors will get a benefit that is less than the medium earners benefit described here since their average earnings are less than that of a medium earner and they start collecting Social Security benefits before age 65.

Furthermore, the portion of income going to health care costs will increase through time according to the CBO analysis. This is due both to aging of individuals and to increasing health care costs through time. As noted insurance for older beneficiaries will cost more than insurance for younger beneficiaries, but Representative Ryan's voucher would still only pay the same amount for their care. This means that if the average 80-year-old cost twice as much to insure as the average 65-year-old, then the premium that would come out of a seniors' pocket would be twice as large. This implies that if the program had been in effect for 15 years in 2030 then the average senior would be paying $41,400 for a Medicare equivalent insurance package in 2030, 25 percent more than the medium earner's benefit in that year.

The other reason that Representative Ryan's plan will lead to rising health care costs for seniors through time is that the voucher payment does not keep pace with health care cost inflation. As costs continue to rise relative to the voucher, seniors will be required to pay a larger portion of their health care costs themselves. It is worth noting that 2030 is only 8 years after the voucher program kicks in.

J. Bradford Delong: Seven Sects of Macroeconomic Error.

2011-03-24T07:49:00.004-04:00

This is going to be required reading in at least some of my classes.

I would post a link to Professor DeLong's blog but attempts to do so have crashed the computers in the adjunt corral. Here is the pdf.

UPDATE: Here is a link to the actual blog post now that I'm at a computer made in the last 10 years: http://delong.typepad.com/sdj/2011/03/seven-sects-of-macroeconomic-error.html

Thomas Frank: The God that Sucked.

2011-03-24T07:01:00.004-04:00

This is an old Thomas Frank article, I believe it was printed in The Baffler magazine in 2001. I'm posting it here becuase it should be read.

The God That Sucked

Thomas Frank

Despite this, many economists still think that electricity deregulation will work. A product is a product, they say, and competition always works better than state control. "I believe in that premise as a matter of religious faith," said Philip J. Romero, dean of the business school at the University of Oregon and one of the architects of California's deregulation plan.
--New York Times, February 4, 2001

Time was, the only place a guy could expound the mumbo jumbo of the free market was in the country club locker room or the pages of Reader's Digest. Spout off about it anywhere else and you'd be taken for a Bircher or some new strain of Jehovah's Witness. After all, in the America of 1968, when the great backlash began, the average citizen, whether housewife or hardhat or salary-man, still had an all-too-vivid recollection of the Depression. Not to mention a fairly clear understanding of what social class was all about. Pushing laissez-faire ideology back then had all the prestige and credibility of hosting a Tupperware party.

But thirty-odd years of culture war have changed all that. Mention "elites" these days and nobody thinks of factory owners or gated-community dwellers. Instead they assume that what you're mad as hell about is the liberal media, or the pro-criminal judiciary, or the tenured radicals, or the know-it-all bureaucrats.

For the guys down at the country club all these inverted forms of class war worked spectacularly well. This is not to say that the right-wing culture warriors ever outsmarted the liberal college professors or shut down the Hollywood studios or repealed rock 'n' roll. Shout though they might, they never quite got cultural history to stop. But what they did win was far more important: political power, a free hand to turn back the clock on such non-glamorous issues as welfare, taxes, OSHA, even the bankruptcy laws, for chrissake. Assuring their millionaire clients that culture war got the deregulatory job done, they simply averted their eyes as bizarre backlash variants flowered in the burned-over districts of conservatism: Posses Comitatus, backyard Confederacies mounting mini-secessions, crusades against Darwin.

For most of the duration of the thirty-year backlash, the free-market faiths of the economists and the bosses were kept discreetly in the background. To be sure, market worship was always the established church in the halls of Republican power, but in public the chant was usually States' Rights, or Down with Big Gummint, or Watch out for Commies, or Speak English Goddammit. All Power to the Markets has never been too persuasive as a rallying cry.
So confidently did the right proceed from triumph to triumph, though, that eventually they forgot this. Inspired by a generous bull market and puffed up by a sense of historical righteousness so cocksure that it might have been lifted from The God That Failed, that old book in which ex-Communists disavowed their former convictions, the right evidently decided in the Nineties that the time had come to tell the world about the wonders of the market.

Dinesh D'Souza, pedagogical product of the Jesuits, these days can be found swinging the censer for Mammon and thrilling to the mayhem his ruthless "god of the market" visits on the undeserving poor. George Gilder, erstwhile elder of the Christian right, is now the Thirty-Third Degree Poobah in the Temple of Telecosm, where he channels the libertarian commandments of his digital Juggernaut in the language of the angels.

A host of awesome myths attest to the power of this new god. Markets must rule, some right-wing prophets tell us, because of "globalization," because the moral weight of the entire world somehow demands it. Others bear tidings of a "New Economy," a spontaneous recombination of the DNA of social life according to which, again, markets simply must rule. The papers fill with rapturous talk of historical corners turned, of old structures abandoned, of endless booms and weightless work.

The new god makes great demands on us, and its demands must be appeased. None can be shielded from its will. The welfare of AFDC mothers must be entrusted unhesitatingly to its mercies. Workers of every description must learn its discipline, must sacrifice all to achieve flexibility, to create shareholder value. The professional, the intellectual, the manager must each shed their pride and own up to their flawed, lowly natures, must acknowledge their impotence and insensibility before its divine logic. We put our health care system in its invisible hands, and to all appearances it botches the job. Yet the faith of the believers is not shaken. We deregulate the banking industry. Deregulate the broadcasters. Deregulate electricity. Halt antitrust. Make plans to privatize Social Security and to privatize the public schools.

And to those who worry about the cost of all this, the market's disciples speak of mutual funds, of IPOs, of online trading, of early retirement. All we have to do is believe, take our little pile of treasure down to the god's house on Wall Street, and the market rewards us with riches undreamed of in human history. It gives us a Nasdaq that is the envy of the world and a 401(k) for each of us to call his own.

Then, one fine day, you check in at Ameritrade and find that your tech portfolio is off 90 percent. Your department at work has been right-sized, meaning you spend a lot more time at the office-without getting a raise. You have one kid in college to the tune of $30,000 a year, another with no health insurance because she's working as a temp. Or maybe you lost your job because they can do it cheaper in Alabama or Mexico. Your daughter's got a disease that requires $400 a month in drugs, and your COBRA insurance benefits are due to run out in two months. Or maybe you're the Mexican worker who just got a new maquiladora job. You have no electricity, no running water, no school for your children, no health care, and your wage is below subsistence level. And should you make any effort to change these conditions-say, by organizing a union not aligned with the corrupt PRI-you're likely to get blacklisted by local factory managers.

That's when it dawns on you: The market is a god that sucks. Yes, it cashed a few out at the tippy top, piled up the loot of the world at their feet, delivered shiny Lexuses into the driveways of their ten-bedroom suburban chateaux. But for the rest of us the very principles that make the market the object of D'Souza's worship, of Gilder's awestruck piety, are the forces that conspire to make life shitty in a million ways great and small. The market is the reason our housing is so expensive. It is the reason our public transportation is lousy. It is the reason our cities sprawl idiotically all across the map. It is the reason our word processing programs stink and our prescription drugs cost more than anywhere else. In order that a fortunate few might enjoy a kind of prosperity unequaled in human history, the rest of us have had to abandon ourselves to a lifetime of casual employment, to unquestioning obedience within an ever-more arbitrary and despotic corporate regime, to medical care available on a maybe/maybe-not basis, to a housing market interested in catering only to the fortunate. In order for the libertarians of Orange County to enjoy the smug sleep of the true believer, the thirty millions among whom they live must join them in the dark.

But it is not enough to count the ways in which the market sucks. This is a deity of spectacular theological agility, supported by a priesthood of millions: journalists, admen, politicians, Op-Ed writers, think-tankers, cyberspace scrawlers, Sunday morning talk-show libertarians, and, of course, bosses, all of them united in the conviction that, no matter what, the market can't be held responsible. When things go wrong only we are to blame. After all, they remind us, every step in the economic process is a matter of choice. We choose Ford over Dodge and Colgate Total over Colgate Ultra-Whitening; we choose to take that temp job at Microsoft, to live in those suburbs, to watch Channel 4 rather than Channel 5. We participate in markets; we build markets; markets, in fact, are us. Markets are a straightforward expression of the popular will. Since markets are the product of our choices, we have essentially authorized whatever the market does to us. This is the world that we have made, let us rejoice and be glad in it.

Virtually any deed can be excused by this logic. The stock market, in recent years a scene of no small amount of deceit, misinformation, and manipulation, can be made to seem quite benign when the high priests roll up their sleeves. In October 1999, a heady time for small investors, Andy Serwer of Fortune could be heard telling the inspiring story of an investment "revolution" in which the financial power of "a few thousand white males" in New York was "being seized by Everyman and Everywoman." We the people had great, unquestionable power: Serwer's article was even illustrated with clenched fists. We had built this market, and it was rewarding us accordingly. But these days Serwer is pondering the problem of "stock market rage" as those same Everyman investors are turned inside out by the destruction of $4 trillion of Nasdaq value. Now that the country is in the sort of situation where brokers and bankers might find themselves in deep political shit, Serwer observes that we have become quite powerless. Investors are "mad as hell," Serwer notes, but "there isn't much [they] can do about it." The explanation for this supposed impotence is, strangely, a moral one: Choice. Since those lovable little guys acted of their own free will when they invested in Lucent, PMC Sierra, and Cisco, today there is no claim they can make that deserves a hearing. What has happened is their fault and theirs alone.

The market only fails us, it seems, when we fail it-when our piety is somehow incomplete, when we don't give the market enough power, when we balk at entrusting it with our last dime. Electricity deregulation didn't work in California, the true believers chant, because the scheming elitist political class of that state betrayed the people, refusing to give them enough choice, to deregulate all the way.

Free to choose is a painfully ironic slogan for the market order. While markets do indeed sometimes provide a great array of consumer choices, the clear intention of much of the chatter about technology, "globalization," and the "New Economy" is, in fact, to deny us any choice at all. Moving from rhetoric to the world of financial politics the same logic holds true: Markets show a clear preference for the shutting down of intellectual dissent and political choice. Markets romp joyfully when word arrives that the vote-counting has been halted. Markets punish the bond prices of countries where substantial left parties still flourish. Markets reward those lands-like Bill Clinton's USA-where left parties have been triangulated into impotence. So predictably do markets celebrate the suppression of political difference that Thomas Friedman, the highly respected New York Times columnist, has actually come up with a term for the trade-off: "the golden straitjacket." Since all alternatives to laissez-faire are now historically discredited, Friedman maintains, all countries must now adopt the same rigidly pro-business stance. When they do, "your economy grows and your politics shrink." The pseudodemocracy of markets replaces the real democracy of democracy; the great multinational corporations nod their approval; and the way is clear for (some) people to get fantastically rich.

Friedman has a point. Consider the case of Singapore, long the inamorata of market heavies and their press agents. As we all know by now, Singapore is an economic miracle, a land arisen from Third World to First in a handful of decades. Singapore is the land with the most economic freedom in the world. Singapore is more comprehensively wired than anywhere else. Singapore is the best place to do business in all the earth. And as proof you need look no further than a postcard of Singapore's glittering downtown, at all the spanking new skyscrapers erupting from the earth in stern testimony to the market's approval.

And what the market loves best about Singapore is what is absent: Politics. Singapore's shopping malls-heavenly landscapes of chrome and polished granite, of flashing jumbotrons and free floor shows for the kids-trump those of our own land. But politically the country is a dull monotone. Here there is little danger that opposition parties will come to power or that crusading journalists will violate the rules of what Singaporeans call "self-censorship."

So what replaces politics? What fills the blank space left when a country has sacrificed dissent on the altar of the market? In Singapore, the answer seems to be management theory. Settling down one Sunday afternoon in that country with a copy of the Straits-Times, the more or less official newspaper, I turned to the section most American newspapers reserve for book reviews and think-pieces and found instead: a profile of the management guru who co-wrote the One to One series of marketing books; a column about the urgent need to adapt to waves of workplace "change" (you know, like "outsourcing"); an enthusiastic story about the new president of PepsiCo, a native of India who reportedly studies videotapes of Michael Jordan's greatest basketball moments in order to "catch insights about the value of teamwork"; a profile of the management guru who co-wrote The Individualized Corporation ("Power to the people is [his] motto"); a profile of one of the paper's writers in which the concept of "the journalist as a brand" is the point of departure; and a review of one of those sweeping, pseudo-historical books so beloved of business readers that start out with the Neanderthals and end up affirming various contemporary management homilies about creativity and entrepreneurship.

Management theory has become so variegated in recent years that, for some, it now constitutes a perfectly viable replacement for old-fashioned intellectual life. There's so much to choose from! So many deep thinkers, so many flashy popularizers, so many schools of thought, so many bold predictions, so many controversies!

For all this vast and sparkling intellectual production, though, we hear surprisingly little about what it's like to be managed. Perhaps the reason for this is because, when viewed from below, all the glittering, dazzling theories of management seem to come down to the same ugly thing. This is the lesson that Barbara Ehrenreich learns from the series of low-wage jobs that she works and then describes in all their bitter detail in her new book, Nickel and Dimed. Pious chatter about "free agents" and "empowered workers" may illuminate the covers of Fast Company and Business 2.0, but what strikes one most forcefully about the world of waitresses, maids, and Wal-Mart workers that Ehrenreich enters is the overwhelming power of management, the intimidating array of advantages it holds in its endless war on wages. This is a place where even jobs like housecleaning have been Taylorized to extract maximum output from workers ("You know, all this was figured out with a stopwatch," Ehrenreich is told by a proud manager at a maid service), where omnipresent personality and drug tests screen out those of assertive nature, where even the lowliest of employees are overseen by professional-grade hierarchs who crack the whip without remorse or relent, where workers are cautioned against "stealing time" from their employer by thinking about anything other than their immediate task, and where every bit of legal, moral, psychological, and anthropological guile available to advanced civilization is deployed to prevent the problem of pay from ever impeding the upward curve of profitability. This is the real story of life under markets.But the point where all the "New Economy" glory and promise really start to suck, where all the vaunted choice and empowerment of free markets are revealed as so many creaking stage devices, is when Ehrenreich takes on the shiniest of all the Nineties myths-productivity. With the country as close to full employment as it has ever been in 1999 and 2000, wages did not increase as much as standard economic theory held they ought. Among the devout this was cause for great rejoicing: Through a titanic national effort we had detached productivity from wages, handing the gains over to owners and shareholders instead. But this was less a "choice" that Americans consciously made than it was, as Ehrenreich makes undeniably evident, the simple triumph of the nation's managers, always encouraging employees to think of themselves as stakeholders or team members even as they unilaterally dictate every aspect of the work experience.
The social panorama that Ehrenreich describes should stand as an eternal shrine to the god that sucked: Slum housing that is only affordable if workers take on two jobs at once; exhausted maids eating packages of hot-dog buns for their meals; women in their twenties so enfeebled by this regimen that they can no longer lift the vacuum cleaners that the maid service demands they carry about on their backs; purse searches, drug tests, personality tests, corporate pep rallies. Were we not so determined to worship the market and its boogie-boarding billionaires, Ehrenreich suggests, we might even view their desperate, spent employees as philanthropists of a sort, giving selflessly of their well-being so that the comfortable might live even more comfortably. "They neglect their own children so that the children of others will be cared for," she writes; "they live in substandard housing so that other homes will be shiny and perfect; they endure privation so that inflation will be low and stock prices high."

These are the fruits of thirty years of culture war. Hell-bent to get government off our backs, you installed a tyrant infinitely better equipped to suck the joy out of life. Cuckoo to get God back in the schools, you enshrined a god of unappeasable malice. Raging against the snobs, you enthroned a rum bunch of two-fisted boodlers, upper-class twits, and hang-em-high moralists. Ain't irony grand.

Fiscal Policy: Modern Macroeconomic Theory and Evidence

2011-03-01T17:30:00.003-05:00

This is a lit review that I wrote working up to my dissertation topic. I think it may be useful because its a good summary of both general equilibrium fiscal policy theory and VAR empirical work over the last 20-25 years. I am putting this on the blog because I am hoping that blogger.com devotes some resources to search engine optimization.

Fiscal Policy: Modern Theory and Evidence

What I did this weekend (the internet is both a blessing and a curse)

2011-02-13T14:33:00.008-05:00

Barry Schwartz on the paradox of choice (ted.com).

Here is some comparison shopping I'm doing. These scatter plots are based on listings on cars.com, ebay, autotrader.com, carsdirect.com and vehix.com listings of the cars between 0 and $8000 dollars:

Update:

Another metric for comparison shopping.

I think this counts as the interaction effect:

Spring 2011; Econ 101: Macroeconomics: T-TH 9:25-10:40

2011-01-29T13:01:00.023-05:00

*******How I am going to deal with the final exam scheduling conflict: is here

********Please fill out student evaluations: Links Here

I will be posting course material here. As you probably noticed there is a direct link to this post on the right hand side of the blog. The material posted here is for: Econ 101: Macroeconomics; Spring 2011 T-TH 9:25-10:40 Section: I can be reached at: andrew.a.bossie@gmail.com Office Hours: Tuesday and Thursday: 7:00 to 8:00 and 10:40-11:00 If I am not in the classroom (PH154) I will be in the adjunct office in the economics department: PH300B

Syllabus

Readings (etc):

J Bradford DeLong: "The Seven Sects of Macroeconomic Error"

Matt Taibbi "The Great American Bubble Machine"

Andrew Bossie "The Demand For Treasuries"

Planet Money Episode #216: “How Four Drinking Buddies Saved Brazil” (iTunes: Free 20 min)

Inside Job: On Netflix . I have not been able to find this available anywhere on the web for free.

Homework:

1. Must be handed in during class.

2. Must be stapled. Assignments not stapled will lose a letter grade

3. You must answer all questions. Failure to answer one question will result in a check minus. Failure to answer more than one question will result in a zero.

4. Rules for Emailing homework assignments (emrgencies only)

a. Must be a single, legible pdf or word document.

b. Must be time stamped before the begining of class on the day it is due.

Homework assignment #1: Due March 1st

Homework Assignment #2: Due March 10th

Homework Assignment #3: Due April 12th

Homework Assignment #4: Due April 28th

Final Prep:

**I had promised to have the problem set posted on Thursday afteroon, and I did. Blogger then went down for some reason and they erased all of Thursday's new post. Anyway they had said they would restore the posts and they haven't. I apologize, this is kind of terrible timing.

Midterm #2

Problem set

Answers to the first sample final. We will over over both tests on Tuesday May 17th

There is some overlap with the homework, but I wanted to give you a complete final so you can get a sense of what they are like. Obviously there are no questions about the readings.

Final Chapters: 10, 12, 13, 14 (money), 15 ,15 appendix, and readings.

Spring 2011; Econ 215: Money and Banking; T-TH 8:00-9:15

2011-01-29T12:53:00.022-05:00

How I am going to deal with the finals scheduling conflict: is here

Please fill out student evaluations: Links Here

I will be posting course material here. As you probably noticed there is a direct link to this post on the right hand side of the blog. The material posted here is for: Econ 215: Money and Banking Spring 2011; T-TH 8:00-9:15

Room PH154

I can be reached at: andrew.a.bossie@gmail.com Office Hours: Tuesday and Thursday: 7:00 to 8:00 and 10:40-11:00 If I am not in the classroom (PH154) I will be in the adjunct office in the economics department: PH300B. If it is before 9:00ish you have to call me on the phone outside of the economics department. Usually I can hear you if you knock, as well.

Syllabus

"Reading" Assignments:

Planet Money Episode #235: “A Giant Stone Coin At The Bottom of the Sea” (ITunes: Free 21 min) http://www.npr.org/blogs/money/2011/01/28/131963928/the-friday-podcast-a-giant-stone-coin-at-the-bottom-of-the-sea

Planet Money Episode #216: “How Four Drinking Buddies Saved Brazil” (iTunes: Free 20 min) http://www.npr.org/blogs/money/2010/10/01/130267274/the-friday-podcast-how-four-drinking-buddies-saved-brazil

March 29:

"The Demand For Treasuries"

This American Life Episode #355: “The Giant Pool of Money” (iTunes: 99cents 1 hour)

Matt Taibbi: The Great American Bubble Machine

Inside Job: On Netflix. I have not found any place to watch this for free.

Homework Assignments:

1. Must be handed in during class.

2. Must be stapled. Assignments not stapled will lose a letter grade

3. You must answer all questions. Failure to answer one question will result in a check minus. Failure to answer more than one question will result in a zero.

4. Rules for Emailing homework assignments (emrgencies only)

a. Must be a single, legible pdf or word document.

b. Must be time stamped before the begining of class on the day it is due.

Homework Assignment #1: Due 2/22

Homework Assignment #2: Due 3/10

Homework Assignment #3: Due 4/12

Homework Assignment #4: Due 4/28

Final Prep:

**I had promised to have the problem set posted on Thursday afteroon, and I did. Blogger then went down for some reason and they erased all of Thursday's new post. Anyway they had said they would restore the posts and they haven't. I apologize, this is kind of terrible timing.

Midterm #2

Sample Final 1

Sample Final 2

We will over over both tests on Tuesday May 17th

There is some overlap with the homework, but I wanted to give you a complete final so you can get a sense of what they are like. Obviously there are no questions about the readings.

Final Chapters: 5, 6, 10, 14, 15 and readings.

Money and Banking Podcasts

2011-01-29T12:51:00.000-05:00

This American Life Episode #355: “The Giant Pool of Money” (iTunes: 99cents 1 hour)

http://www.thisamericanlife.org/Radio_Episode.aspx?episode=355

This American Life Episode #375: “Bad Bank” (iTunes: 99cents 1 hour)

http://www.thisamericanlife.org/radio_episode.aspx?sched=1285

Planet Money Episode #216: “How Four Drinking Buddies Saved Brazil” (iTunes: Free 20 min)

http://www.npr.org/blogs/money/2010/10/01/130267274/the-friday-podcast-how-four-drinking-buddies-saved-brazil

Planet Money Episode #208: “How to Spend 1,249,999,999,999.39 (Itunes: Free 23 min)

http://www.npr.org/blogs/money/2010/08/31/129558498/the-tuesday-podcast-how-to-spend-1-249-999-999-999-39

Planet Money Episode #235: “A Giant Stone Coin At The Bottom of the Sea” (ITunes: Free 21 min)

http://www.npr.org/blogs/money/2011/01/28/131963928/the-friday-podcast-a-giant-stone-coin-at-the-bottom-of-the-sea

After Reading Hyman Minksy's "Stabilizing an Unstable Economy".

2011-01-06T11:38:00.003-05:00

I made my way through Hyman Minsky's "Stabilizing an Unstable Economy". While I don't 100% agree with Minsky--or rather I dont think Minsky 100% applied to the current Recession--I have to say the book is astoundingly prescient and much of what Minsky says seems more appropriate now than it did in 1986 when the book was published.

Anyway, I go a couple of things from Minksy:

First, I obviously got a better fleshed out version of the Minsky business cycle.

Second, is that he has "complete" theory of post-war stability (in the US) which is something I have been looking for since I had read Rogoff and Reinhart's "This Time is Different" which has some really interesting contrasts between the first 30 years of the post war era and the secon 30 years. I also have been wondering about this because Charles Calomiris dismissed the post-war stability. Gary Gorton has also dismissed the stability of the whole FDIC period from it's creation to 2007 as an accident of history.

Anyway, Minsky seems to agree with with Gorton and Calomiris in that FDIC essentially existed as something to be innovated around. I also thing Calomiris is right about the problems with FDIC though I think Gorton's "21st Century bank run" in repo markets story--which has nothing to do with FDIC is more relevent to the Great Recession. Anyway, Minsky places the stability of the post-war era not in how banks were operating but in the fact that corporations were not terribly reliant on banks. Minsky's basic claim is that it took about 20 years for the corporate sector to work through the savings it had accumulated in the 40s. It was only when corporations had in increase demand for external finance that innovation and instability started to set in. Minsky also places the beginning of post-war financial instability in 1966 with the Credit Crunch. I'm betraying my ignorance here, but I would have named the S&L crisis as the start of modern era of financial instability.

Third, Minsky also pretty clearly articulated what I believe is the Keynesian theory of finance. In a nutshell the Minskian/Keynesian theory of finance is a demand side theory of finance. The financial system will come up with the funds the investment sector asks for provided it can earn a positive return. I find this interesting because it is essentially the opposite way of thinking about savings/investment as the baseline "General Equilibrium Model" in the GE model the infinitely forward looking household makes all of the decision for the economy based on it intertemporal consumption preferences. This is a strictly supply side model in which investment is passive warehouse for future consumption. GE models also lead to Ricardian equivelence--the indifference between financing government with taxes and debt--because financing government spending through debt simply cause the supply side to adjust their savings behavior 1 to 1 in anticipation of a future decline in consumption brought on by the eventually higher taxes needed to pay back the debt.

On the other hand a more holistic was of looking at savings/investment is by using the simple "loanable funds" simple supply and demand. The problem with the simple supply and demand model is that--as Keynes points out in the "General Theory"--there is no phenomenon that will only shift one curve. If your econ 101 professor was responsible he would have hammered into your brain the limitations of using supply and demand to make predictions when both curves shift. Depending on the direction of the shifts, either the price (the interest rate) or the quantity of loanable funds will be indeterminate. Usually shocks to the loanable funds market shift both supply and demand in the same direction, which makes the direction of the change in the interest rate indeterminate.

So one either gets a holistic model or opposing models that you can make predictions with because one curve is either constant, vertical, horizontal or irrelevant (or some combination of the 4). I don't have a lot to say about this except to say that this seems like the central empirical issue of what kind of influence government can have over the economy.

Finally--and I'm burring this-- I started reading Minsky because my search for a good explanation of Keynes' "General Theory" because I was completely confused about what Keynes was talking about. Turns out the reason I didn't understand was because I was looking for the Aggregate Supply/Demand and the IS/LM models that I teach to undergraduates. Minsky has a great chapter about the intellectual history of my confusion and so I could go back to reading "The General Theory" without wondering where the hell the sticky wages and the self correcting mechanims were.

The Demand For Treasuries.

2011-01-03T10:08:00.020-05:00

There have been a number of things lately such as the SS debate, reading both the General Theory and Hyman Minsky's "Stabilizing and Unstable Economy", and--not least of all--my dissertation that have got me thinking about the demand for treasuries. We are used to thinking about government debt as a supply side phenomenon, simply politicians turning on the printing presses so to speak.

To illustrate, here is a question from my final (both Marco and Money and Banking) that I asked:

In the US right now corporate investment is extremely low as corporations are now holding historically high levels of liquid assets instead of spending their profits. As well, foreign savings continues to flow into the US because US assets/investments increasingly looks good compared to European assets. Finally, private savings rates are increasing as American households try to "repair their balance sheets" and make up for wealth lost when the housing bubble popped. Use the “Savings/Investment Identity” to show what must happen if capital inflows and households savings are increasing while at the same time investment is decreasing.

To answer this question you need this identity:

Investment (I) = Private Savings (PS) + Capital Inflows (KI) +Government Savings (GS)

Necessarily, if the events I outlined are true, Government Savings has to fall, that is, the government has to run a deficit. Now, this is an idenity and it doesn't tell you anything about what is driving what. But the way I framed the identity it is all about the demand side for treasuries. In a weird way, the extension of the Bush tax cuts following on the heals of the Eurozone crisis can be seen as a kind of market response to demand.

Anyway, I decided to dig around in the Fed's Flow of Funds and the Federal Government's Budget data to see what the demand side has looked like historically.

Right away I'm gonna deal with the mot controversial part of this little exercise. I am including the Social Securty Trust Fund as part of the demand for debt. Here is my version of a graph I'm sure you've seen a million times:

Figure 1

So Social Security is about half of the debt that the federal government owes itself. The reason I have included social security is because even though it is classified as debt that the government owes itself it also represents (potentially) future public debt. Social Security debt is held in special "non-marketable" treasuries and so currently they aren't part of the market for treasury bonds and to that extent the debt is actually different than debt to the public.

However, as the Social Security system starts to take in less money than gets paid into it the Social Security Administration will cash in those bonds. In order to pay back those bonds the federal government will have to pay that back with taxes or issue new debt issued to the open market. Social Security is "postponed debt to the public". I need to be careful and point out that this is not a problem with SS. I'm not much of a deficit/debt hawk and to the extent the debt is worrisome the issue is how we manage the debt/GDP ratio. The shift of trust fund debt to the public would have no effect on the debt/GDP ratio. Depending on how rapidly the trust fund got used up it may have an effect on treasury bond yields but that seems to me like mostly a secondary concern.

I don't want to dwell on Social Security. The dudes (gender neutral!) over at Planet Money have a really good podcast about social security. Maybe my next post will be about Social Security. Anyway, I do need to admit a couple of things. First, it's a little unfair to single out social security for my analysis but I had to make my graphs intelligible. The social security trust fund made up about $2.6 trillion of the $4.3 in debt the government owes itself at the end of 2009. So I'm ignoring $1.7 trillion which is a lot even when talking about an $11.8 trillion deficit.

That $1.7 is mostly made up of the:

Civil Service Retirement Fund ($750 billion)
Department of Defense retirement and Medicare funds ($144+ $295 billion)
The Medicare trust fund ($390 billion)

Anyway, the vast majority of the debt the government owes itself is the investment of retirement entitlements of one kind or another. But like I said, i had to keep my graphs reasonably clear so I'm ignoring $1.7 trillion!

Alright so here is the first graph:

Figure 2

This graph is included for completeness but its kind of hard to read because the Great Recession kind of explodes the graph. It's a good place though to look to explain a few things. First, of all these are "flows" which means what is being shown here are either new (net) purchases or sales of treasuries by each sector for each year. Secondly, the "Remainder" line represents the total new treasury issued in each year minus the sectors show in the graph. It just shows how much of the new treasury debt issued was bought by the sectors I'm looking at. If the Remainder is positive it means the sectors shown under account for new treasury issues in each year. If the Remainder is negative the sectors shown over account for new treasuries. Finally, I chose 1975 as the starting point because that's around when the post-war debt/GDP ratio bottomed out.

I'm going to chop off the Great Recession (and come back to it later. Here we have a picture of what should probably be called the structural deficit that started in the early 80s:

Figure 3

In figure 3 I have lopped off 2007-2010 or, roughly speaking, the Great Recession. I have also put everything into 2005 prices. I am not so sure that was a good idea but I felt like keeping it in nominal dollars distorted the relative importance of each sector over time. I would have preferred to make this a logarithmic chart, but I can't because there are negative values. Anyway, this this is essentially unreadable and won't make sense until after looking at figure 4. However, two things are pretty clear. First, the financial industry seems pretty important to the demand side through the 80s. Second, while state and local government (includes "regular budget" and pension funds) sell off a lot of treasuries in the 90s their purchases seem to recover in the mid 2000s. However, in the 90s households start dumping treasuries and don't look back (until 2008!). Did all the money wind up in the stock market? Did treasuries become a quaint, old timey way to save?

Okay so Figure 4 can help make sense of Figure 3:

Figure 4

So figure 4 is not really "to scale" in any way. Each bar represents 100% of treasury purchases by the sectors I'm looking at (plus the remainder) for each year. However, this does not give any sense of the relative scale of each year. For that look at figures 1 and figures 2.

What's interesting about this chart is that there seems to be a clear shift in the demand for treasury bonds that takes place in the mid 90s. It looks to me like "core demand" shifts from the financial industry to foreign demand. As well in the 90s there seems to be shift of demand from state and local government to Social Security. However, remember these are all shares of a pie that is growing every year. If you look back at figure 2 it seems more that state and local demand remains steady (though falls a little) while SS demand starts to take off in the late 80 due to the 1983 Social Security Amendment.

I found the results from figure 5 to be pretty surprising:

Figure 5

I chose 1971 because that's when the US went off the gold standard (officially) and I was curious to see if that meant anything. Now what'ss obvious here is how important foreign "official" institutions (mostly foreign central banks) are as a source of treasury demand. I had taken the role of the US dollar as a "reserve currency"--as a currency other central banks hold as a way of managing their own currencies-- for granted. However, it is quite striking how important our role as a reserve currency is in creating demand for our treasury bonds. Other countries prefer to hold treasury bonds instead of dollars because they are essentially as safe as dollars and they pay a return.

I want to go over two things. First, I don't think this post would be complete without a graph of the last couple of years (at least through 2009, which is all I have numbers for):

Figure 5

The scale of figure 5 is nominal dollars. The Fed sold off a whole bunch of treasury bonds in 2008 in order to purchase (or sometimes exchange) for things that were not treasury bonds like a Mall in Oklahoma (Planet Money Again). Foreign demand went through the roof and financial business came back to buying treasuries. Foreign demand is probably going to get stronger now that Europe is becoming more and more of a mess, a phenomenon called "flight to quality". As far as the financial industry buying treasuries that's a function of the Fed loaning tons of money to banks basically for free. Banks and other financial intermediaries then take the money and buy safe as houses treasury bonds and take home the difference. It helps keep treasury bond yields low and Wall Street bonuses flowing.

Finally, I'm not 100% sure I've done a good job making it clear how important governments are to the demand for treasuries. Here is one more homemade chart:

Figure 6

I double checked this graph after I made it because I find it really surprising. I feel that this really makes it clear how important political entities are to the demand side of the treasury debt market. I know I'm trying to play both sides of the fence here by saying that SS should be thought of as simply postponed debt to the public and then putting it up here as part of "political" debt. But I think its justifiable because a lot of the discussion these days is about "the market" for treasury bonds and how market bond vigilantes may soon send us the way of Greece and Ireland. However, the vast majority of treasury debt is dependent on political decisions and political entities (in 2009, the gray area of figure 6 was only $3.4 trillion of 11.9 trillion). Here again Social Security is useful as illustration. While I do believe Social Security is "real debt" the political debate today seems to be all about trying to avoid having to turn these non-marketable securities into "general fund" debt very quickly or at all either by cutting benefits or by raising current taxes. As well, it seems highly unlikely that the Chinese are going to stop pegging the Yuan to the dollar any time soon even if they are going to tweak it here and there. As well, the Fed is obviously extremely sensitive to what it does to the treasury market and even a good portion of the private market debt are essentially back door "open market purchases" made through arbitraging financial intermediaries.

Now, I'm not willing necessarily to call demand based on political decisions more stable, but it's not obvious that even if the fantasy of bond vigilantism came true that they would have necessarily that much of an effect.

Oh and also on the "we aren't Greece or Ireland" tip. I feel like this is a good place to put this graph from the Financial Times:

Figure 7

The basic point to be made here is that the analogy is not between the US and the second tier developed nations of the Eurozone. The proper comparison is the comparison between the US, the financial center of the world with the world's reserve currency is with the UK when it held that position. However, I do have to admit it's not entirely clear which UK we are talking about. The post Napoleon UK was an empire experiencing very robust growth on the whole. The post Hitler UK on the other hand was the shell of a collapsed empire that eventually needed to be bailed out by the IMF in the mid 70s.

it should be pointed out that the post WWII UK had lost it's prominent position as the worlds financial center with the world's reserve currency. The US remains strong on both fronts. While there is much talk of China, their financial markets are still in their infancy and you aren't even allowed to trade Yuan. Before their own subprime crises the EU looked like it could possibly be a contender but that seems far more remote now although this crisis may bring the Eurozone closer to a fiscal union which they would need to compete effectively with treasury bonds. At any rate the US seems pretty secure as the worlds tallest midget.

Naked Capitalism: Marshall Auerback: Bankers Gone Wild in Ireland AND Germany

2010-12-04T10:50:00.002-05:00

Marshall Auerback: Bankers Gone Wild in Ireland AND Germany

By Marshall Auerback, a hedge fund manager and portfolio strategist who writes for New Deal 2.0.

Despite a blame-a-thon on Ireleand, Germans banks are really at the core of the eurozone catastrophe.

Much ink has been spilled in the press over the Irish problem and the laxity of the country’s southern Mediterranean counterparts in contrast to the highly “disciplined” Germans. But perhaps we have to revisit that caricature. Not only has the Irish crisis blown apart the myth of the virtues of fiscal austerity during rapidly declining economic activity, but it has also illustrated that Germany’s bankers were every bit as culpable as their Irish counterparts in helping to stoke the credit bubble.

One of the traditional rationales for the creation of the euro was that a single currency and strict Maastricht criteria would keep the profligate Mediterraneans and their Celtic equivalents in line. Instead, critics, particularly in Germany, increasingly see the European Monetary Union as a means for freeloading nations to offload their liabilities onto fitter neighbors.

Not surprisingly, this has engendered much discussion that perhaps it would serve Germany’s interests to leave the euro, rather than booting one of the Mediterranean “scroungers” out. But as Simon Johnson has pointed out, this comforting narrative of German prudence matched up against Irish profligacy doesn’t really stack up:

German banks in particular lost their composure with regard to lending to Ireland — although British, American, French and Belgian banks were not so far behind. Hypo Real Estate — now taken over by the German government — has what is likely to be the highest exposure to Irish debt.

But look at loans outstanding relative to the size of their domestic economies (using the BIS data on what they call an “ultimate risk basis”).

German banks are owed $139 billion, which is 4.2 percent of German G.D.P. [my emphasis]

Where were the German regulators? As my colleague Bill Black has noted:

They seem to have believed that ‘What happens in Vegas (Dublin) stays in Vegas (Dublin).’ Instead, their German banks came back from their riotous holidays in the PIIGS with BTDs (bank transmitted diseases). The German banks’ regulators continue to let them hide the embarrassing losses they picked up on holiday, but that cover up will collapse if any of the PIIGS default. The PIIGS will default if the EU does not bail them out, so there will be a bail out even though the German taxpayers hate to fund bailouts.

German banks’ relatively high exposure to Ireland does pose the question as to whether there is some wild, Weimar-style hyperinflationista lurking deep in the heart of every German, only able to express itself fully when away from the prying eyes of fellow citizens.

All of the rescue plans that have been introduced in Ireland or Greece thus far rest on the assumption that, with more time, the eurozone’s problem children could get their fiscal houses in order — and Europe could somehow grow its way out of trouble. But the fiscal austerity being offered as the “medicine” is turning out to be worse than the disease. It has exacerbated the downturn and unleashed a horrible debt deflation dynamic in all of the areas where it was reluctantly implemented.

But here’s the thing: these fiscal straitjackets obscure the history of how we came to today’s horrible impasse and, more specifically, the German banks’ role in helping to fuel the credit binge. Also lost is the reason why this has metastasized into a far greater crisis: as part of the eurozone, Ireland does not have the fiscal freedom to come up with a sufficiently robust government response. The UK had a comparable real estate bubble in the late 1980s, which culminated with the Soros attack on the pound in 1992 and the ejection of sterling from Exchange Rate Mechanism (the precursor to the EMU). This was a blessing in disguise. Withdrawal from the ERM saved the UK because it allowed the country sufficient latitude to reflate. Yes, the country had a major recession (in many ways a consequence of the surrender of fiscal freedom as a result of joining the ERM in the first place), but there was never a systemic risk that posed a threat to the country’s overall solvency as is the case in Ireland today. And this is exacerbating the problem in Ireland because it persists in chasing its tail repeatedly with futile fiscal austerity measures.

The truth of the matter is this: the eurozone seems rotten to the core, literally. Germany represents that core. The Germans might occupy the penthouse suite, but it is the suite of a roach motel. And we know what happens to those who enter such “establishments.”

Yes, longer term the problems currently afflicting the eurozone could be sorted via the creation of a supranational fiscal authority — a “United States of Europe”. But with each crisis (Ireland today; Portugal and Spain tomorrow; Italy and then France next?), the political forces are coalescing in a radically different direction. The Germans are becoming increasingly resentful as they perceive their country as the bailout mechanism of last resort (even though the Irish experience suggests that their bankers are also guilty of many of the same excesses as the “Celtic Tiger”). The PIIGS themselves are seeing that the benefits of euro membership have been vastly overstated and in fact now act as a cancerous influence through the Germanic embrace of austerity. (Paradoxically, it has been the “profligate” behavior of those so-called lazy Mediterraneans that has enabled Germany to retain its export-driven model, as well as allowing it to run lower budget deficits than most other countries.)

The eurozone could ultimately end up like Yugoslavia writ large. Prior to the break up of that country, the relatively rich republics, Slovenia and Croatia, resented policies that transferred wealth to the poorer republics like Serbia, Macedonia, Montenegro, or the autonomous region of Kosovo. Once Tito’s organizing genius disappeared, the links stitching the country together became frayed and eventually snapped as old grievances manifested themselves in newer forms. The same could happen to the Europe Union if it underwent a supranational fiscal union — the beginnings of which are already in evidence. I think the Germans are beginning to recognize that, which is why there is discussion about leaving the euro.

But let’s first be clear: German Chancellor Angela Merkel has persistently argued that it is essential that private investors, notably the bond holders, begin to suffer losses so that they will have the proper incentives to provide effective “private market discipline” going forward. She has further argued that it is fair that they suffer losses, given the premium yields they received and their lack of due diligence. That’s an honorable policy. But it’s like the old Irish joke of the driver who gets lost, asks for directions, and is told, “Well, I wouldn’t be starting from here.” By the same token, Ireland clearly illustrates that German banks, as well as their Mediterranean counterparts, would be big losers under the Merkel proposal. Ironically, German financial institutions could find themselves subject to the same kinds of bailouts that Chancellor Merkel and many of her counterparts in Berlin are urging on the Irish and Greeks.

As always, leave it to the Irish to come up with the most poetic response to the crisis. True, W.B. Yeats did not live to see this disaster, but his passionate “September 1913” does evoke the tragedy of today’s Ireland and the futility of the current policy responses for their people (and beyond):

Was it for this the wild geese spread
The grey wing upon every tide;
For this that all that blood was shed,
For this Edward Fitzgerald died,
And Robert Emmet and Wolfe Tone,
All that delirium of the brave?
Romantic Ireland’s dead and gone,
It’s with O’Leary in the grave.

Graves that might soon include not only the O’Learys, but also the Garcias, Texeiras, Moreaus, and Schmidts if a more rational course of action throughout the euro zone is not adopted soon.

Paul Krugman: Bowles-Simpson deficit plan is regressive

2010-11-18T11:42:00.003-05:00

Yep, It’s Regressive

Jon Chait takes another look at Bowles-Simpson, this time with numbers from the Tax Policy Center, and is disillusioned. As I surmised, it redistributes income upward: the bottom 80 percent of families would pay higher taxes than they did in the Clinton years, while the top 20 percent — and especially the top 5 percent — would pay less; not what you’d call shared sacrifice.

The only twist here is that the ultra-rich, the top 0.1 percent, who get a lot of their income from dividends and capital gains, would be hit by having these gains taxed as ordinary income. Even so, they would face a smaller tax increase than the bottom 60 percent.

This wasn’t the plan we’ve been looking for; on taxes, what on earth were they thinking?

Why QE2 and reserves dont matter.

2010-11-16T21:20:00.001-05:00

Auerback: Amateur Hour at the Federal Reserve

By Marshall Auerback, a portfolio strategist and Roosevelt Institute Fellow

As any student of Economics 101 realises, you can control the price of something, or the quantity, but not both simultaneously. In announcing its decision to purchase an additional $600bn of treasuries last week, the Federal Reserve presumably intended to create additional stimulus to an economy, since tepid growth has failed to make a dent in unemployment. Even Friday’s “good” unemployment numbers, where the US economy added 151,000 jobs, were not enough to reduce the current jobless rate of 9.6%.

So is a new round of “QE2” going to do the trick? It would be interesting to figure out how the Fed came to the magic number of $600 billion. Why not a trillion? Why not $250bn? Why $75bn a month? There’s an element of sticking one’s finger in the air and hoping for the best. The Bernanke Fed is slowly reaching Greenspan-like levels of incompetence.

Let’s go back to first principles: Quantitative easing involves the central bank buying financial assets from the private sector – government bonds and maybe high quality corporate debt. In this particular instance, the Fed has announced it will buy $75bn of treasuries a month. So what the central bank is doing is swapping financial assets with the banks – they sell their financial assets and receive back in return extra reserve balances. So the central bank is buying one type of financial asset (private holdings of bonds, company paper) and exchanging it for another (reserve balances at the central bank). The net financial assets in the private sector are in fact unchanged although the portfolio composition of those assets is altered (maturity substitution) which changes yields and returns.

Central bank demand for “long maturity” assets held in the private sector reduces interest rates at the longer end of the yield curve. These are traditionally thought of as the investment rates. This might increase aggregate demand given the cost of investment funds are likely to drop. But on the other hand, the low rates reduce the interest-income of savers who will reduce consumption (demand) accordingly.

Essentially, then, you have a supply side response to a problem of aggregate demand. The cost of investment funds might well drop, although that’s not 100 percent clear. Consider the following example: Let’s say the Fed simply targeted the 10 year treasury at 2.25%. The central bank would have a bid at that level and buy all the securities the market didn’t want to buy at that level. They may in fact buy a lot or a very few, and possibly none at all, depending on Treasury issuance, investor demand, and market expectations.

But the FOMC has announced a limit to the Fed purchase program, both in terms of the monthly amounts and the total quantity. How high will 10 year notes trade with the billions free to trade at market levels?

It could be at much higher yields, which presumably defeats the whole purpose of the program. Of course, if the Fed bought every single 10 year treasury, then for sure they could maintain that rate indefinitely; but then they would have to preclude announcing a specific amount that they wished to purchase. Of course, if the Fed did this, people would undoubtedly squawk about “printing money” and “creating inflation” but again, QE does not actually create new net financial assets.

In fact, the Fed has done nothing but TALK about its plans over the past several months, but has yet to initiate the program. There has been no widespread “money printing” or “currency debasement”. The Federal Reserve announced an INTENTION to do something and private portfolio investors took their cue from that. But as any Asian central banker can tell you, private portfolio preference shifts are notoriously fickle, with conflicting motives. The term structure of rates in Japan would imply a comparable intent to make holding yen unattractive, yet 10 year government bonds in Japan yield less than one percent and the yen remains resolutely strong against the dollar.

Is there another method by which the Fed could influence the long term structure of interest rates? Why not just stop issuing 10 year government paper? If the Treasury had announced they were eliminating everything longer than 2 year notes for new issues there would hardly be any screams of “money printing”?

And how low would the 10 year go?

If the objective is to allow the banks to earn their way out of insolvency, then QE2 is also an ineffective means of doing this, since it flattens the yield curve, but still engenders interest rate risk on the part of the banks which persist in “playing the yield curve”, especially via leverage. There is a more effective means of doing promoting bank profitability in a comparatively risk free way, as my colleague, Randy Wray, has noted:

[T]here is nothing wrong with offering longer-maturity CDs to replace overnight reserve deposits held by banks at the Fed. Banks are content to hold deposits at the Fed—safe assets that earn a little interest. They are hoping to play the yield curve to get some positive earnings in order to rebuild capital. If they can issue liabilities at an even lower interest rate so that earnings on deposits at the Fed cover interest and other costs of financing their positions in assets, this strategy might work. That is what they did in the early 1990s, allowing banks that were insolvent to work their way back to profitability. The Fed could even lend to banks at 25 basis points (0.25% interest) so that they could buy the CDs, then pay them, say, 100 or 200 basis points (1% or 2% interest) on their longer maturity CDs. The net interest earned could tide them over until it becomes appropriate for them to resume lending to households and firms.

To be clear, we are not necessarily advocating banks play the yield curve to restore profitability (far better to have a payroll tax cut for that), or that they get such an arbitrage from the Fed, only that it would work with less risk both to the bank and the financial system than what will result from QE. Ultimately, if the objective is to allow banks to restore profitability via traditional lending activities, then there are far more obvious ways to do so. Let’s first recall that BANKS DO NOT LEND THEIR RESERVES, as is always depicted in the economics textbooks via so-called “fractional reserve lending”. The Federal Reserve Bank is a bank, just like Citibank or Wells Fargo. The Treasury has an account at the bank, just as you or I have a checking account at our local bank. Other banks, like BofA and Wells Fargo have accounts at the Fed as well, and they are called reserve accounts (for more see here).

Reserve accounts are not made up of money held in reserve in case a loan goes bad, they are money held at the Federal Reserve for payment settlement. The reserves of money held in case loans go bad are capital. They are not lent out. The way banks actually operate is to seek to attract credit-worthy customers to which they can loan funds to and thereby make profit. What constitutes credit-worthiness varies over the business cycle and so lending standards become more lax at boom times as banks chase market share. But that’s a function of credit analysis (or the lack of it, as the cycle matures), NOT the bank’s reserve positions.

These loans are made independent of their reserve positions. At the individual bank level, certainly the “price of reserves” will play some role in the credit department’s decision to loan funds. But the reserve position per se will not matter. So as long as the margin between the return on the loan and the bank’s marginal cost of funds is sufficient, the bank will lend

So as long as the margin between the return on the loan and the rate they would have to borrow from the central bank through the discount window is sufficient, the bank will lend (for more explanation, see here).

Consequently, the idea that reserve balances are required initially to “finance” bank balance sheet expansion via rising excess reserves is inapplicable. A bank’s ability to expand its balance sheet is ultimately dictated by the presence of creditworthy borrowers, which is a function of FISCAL POLICY. Instead of expending political capital on pointless accounting shuffles and financial guarantees, or programs such as TALF, TARP, Term Auction Credit, or the Commercial Paper Lending Facility, one could simply implement a $2 trillion tax cut (or spend it via the government, or do revenue sharing with the states), thereby generating increased spending power in the economy, providing significantly higher multiplier effects and ultimately shifting the economy back to self-sustaining growth. This would be far more effective than continuing an endless array of silly Fed programs, which do nothing but diminish the central bank’s credibility and have had minimal impact in terms of economic growth.

In many respects, the markets are already implicitly conceding the ineffectiveness of “QE2”. Within hours of the program being announced, there were stories of “QE3”. Instead of having a situation where the markets “buy the rumor, sell on the news”, it appears to have been more a case of buy the rumor and then double up on the news.

We’ve truly hit amateur hour at the Fed. We’re inciting speculation and the Federal Reserve is acting like the kid in his car seat who keeps turning his toy steering wheel as much as it takes to turn the car. Toy cars, however, won’t get you very far if you plan a long journey, and likewise QE2 is a pretty ineffective vehicle if one wishes to engender genuine economic growth. Eventually, investors will realize they’ve been conned (yet again) by the Fed and the end result won’t be pretty.

Don’t Fear the Rise in the Fed’s Reserve Balances

By Scott Fullwiler

Many in the financial press have noted the rise since September 2008 in the Fed's reserve balances from about $20 billion to more than $800 billion today. A number of well-known economists have expressed concern that this will be inflationary.

However, fears that these are inflationary are misplaced, even inapplicable, as they apply only to a monetary system operating under a gold standard, currency board, or similar arrangement, not the flexible exchange rate system of the U. S.

Under a gold standard, for instance, banks must be careful when creating loans that they have sufficient gold or central bank reserves to meet depositor outflows or legal reserve requirements. This is the fractional banking, money multiplier system standard in the economics textbooks. If there is an inflow of gold, then bank deposit creation can increase and prices can rise. The same can occur if the central bank raises the quantity of reserves circulating relative to its own gold reserves.

But that's not the case under modern monetary systems with flexible exchange rates.

In the U. S., when a bank makes a loan, this loan creates a deposit for the borrower. If the bank then ends up with a reserve requirement that it cannot meet by borrowing from other banks, it receives an overdraft at the Fed automatically (at the Fed's stated penalty rate), which the bank then clears by borrowing from other banks or by posting collateral for an overnight loan from the Fed. Similarly, if the borrower withdraws the deposit to make a purchase and the bank does not have sufficient reserve balances to cover the withdrawal, the Fed provides an overdraft automatically, which again the bank then clears either by borrowing from other banks or by posting collateral for an overnight loan from the Fed.

The point of all this is that the bank clearly does not have to be holding prior reserve balances before it creates a loan. In fact, the bank's ability to create a new loan and along with it a new deposit has NOTHING to do with how many or how few reserve balances it is holding.

In other words, there is no loan officer at any bank that checks with the bank's liquidity officer to see if the bank has reserves before it makes a loan.

What constrains a bank in the creation of new loans and deposits, then? First, there is the fact that there must be a willing borrower . . . one whom the bank deems to be creditworthy. Second, the loan must be perceived as profitable . . . in this case, the bank's ability to raise deposits does matter, since it probably expects the borrower to withdraw the deposit it will create, and finding new deposits is much cheaper for the bank than borrowing from other banks or from the Fed. Third, the loan must be on the regulator's approved list of assets, and if the loan results in an expansion of the bank's balance sheet, the bank must be aware of the impact on its capital requirements and other financial ratios with which the regulator is concerned.

But, how many reserve balances the bank is holding does NOT affect its operational ability to make the loan.

Most fears expressed by economists, policymakers, and the financial press regarding the rise in reserve balances since September presume—like the inapplicable money multiplier model—this will necessarily lead to excessive creation of loans and deposits by banks and thus rising inflation.

But this cannot possibly be true. Banks have the same ability to create loans with $800 billion in reserve balances that they had with $20 billion. The difference now is mostly that they do not see as many creditworthy borrowers coming through their doors, given the deep recession, which has led them to create fewer loans.

Admonishments of banks by members of Congress for "not lending out the TARP funds" make the same mistake. Banks don't lend out TARP funds or any other funds. They create loans and deposits out of thin air, then use reserve balances to settle payments or meet reserve requirements.

For further evidence, consider two recent extreme cases:

In Canada, reserve balances have been effectively zero for over a decade now, and bank lending continues as it does anywhere else. Canada's inflation also has been similar to that of the U. S.

In Japan, under the so-called quantitative easing regime of 2001-2005, reserve balances reached around 15% of GDP, and the monetary base (reserve balances plus currency in circulation . . . often termed "high powered money") reached 23% of GDP. But Japan has, if anything, experienced deflation during and since this period, which is not surprising, since—again—the rising quantity of reserve balances did not enhance Japanese banks' abilities to create loans.

In the U. S., by comparison, reserve balances have reached about 6% of GDP, with the monetary base rising from about 6% to about 12% of GDP since September 2008. Those fearing rising Fed reserve balances apparently haven't noticed that an increase in reserve balances about three times the size in terms of GDP already happened in Japan, with none of the effects that have been predicted for the U. S.

In short, don't fear the rise in the Fed's reserve balances. It is not inflationary because the money multiplier view, found in the textbooks, doesn't apply to the flexible exchange rate monetary system of the U. S. The U. S. may indeed experience rising inflation in the future (or it may not), but it won't have anything to do with the quantity of reserve balances banks are holding.

THURS OCT 28TH CLASS CANCELED

2010-10-28T06:57:00.001-04:00

THURS OCT 28TH CLASS CANCELED

Both Econ 215 (8:00 - 9:15) and Econ 1010 (9:25-10:40) are cenceled today, Oct 28th. See you next Tuesday.

Data sets for dissertation

2010-10-06T12:22:00.003-04:00

Fed state level data

http://fraser.stlouisfed.org/publications/allbkstat/

Mason and Calomiris:

http://research.stlouisfed.org/publications/review/98/05/9805jm.pdf

FDIC member bank data:

Brief explanation of housing in NIPA:

http://www.michaelcarliner.com/HE0110-Hous-GDP.pdf

Required Assginment: "How Four Drinking Buddies Saved Brazil"

2010-10-04T21:31:00.002-04:00

REQUIRED

Since I think this podcast about inflation in Brazil is more likely to make an impression on you than my lectures I am assigning it as a required text. There will be a question on the midterm.

You can listen to it here: Planet Money.

Or you can get it from ITunes (it is free).

Stuff to talk about in class. Week of Sept 21st edition.

2010-09-20T16:10:00.004-04:00

Two things to discuss in class:

NBER announces that July 2009 was the "trough" of the Great Recession:
The Press Release is here

Core CPI does not change in August. Is not news good news?
The Press release is here

Stuff to know (short version):

Recession:
From the WSJ:

From EconSpeak:

As AP reports the National Bureau of Economic Research has deemed that the Great Recession ended in June 2009. While it is true that real GDP has inched upwards over the past 4 quarters, real GDP as of 2010QII was only $13,191.5 billion per year as compared to $13,363.5 billion as of 2007QIV. With 2007 witnessing a growth rate that was less than 2 percent and with negative cumulative growth since then – we are far below full employment today. AP also reports that the President isn’t exactly celebrating this NBER announcement:

CPI:

How is the CPI market basket determined?

The CPI market basket is developed from detailed expenditure information provided by families and individuals on what they actually bought. For the current CPI, this information was collected from the Consumer Expenditure Surveys for 2007 and 2008. In each of those years, about 7,000 families from around the country provided information each quarter on their spending habits in the interview survey. To collect information on frequently purchased items, such as food and personal care products, another 7,000 families in each of these years kept diaries listing everything they bought during a 2-week period.

Over the 2 year period, then, expenditure information came from approximately 28,000 weekly diaries and 60,000 quarterly interviews used to determine the importance, or weight, of the more than 200 item categories in the CPI index structure.

How are CPI prices collected and reviewed?

Each month, BLS data collectors called economic assistants visit or call thousands of retail stores, service establishments, rental units, and doctors' offices, all over the United States, to obtain information on the prices of the thousands of items used to track and measure price changes in the CPI. These economic assistants record the prices of about 80,000 items each month, representing a scientifically selected sample of the prices paid by consumers for goods and services purchased.

What is an index?

An index is a tool that simplifies the measurement of movements in a numerical series. Most of the specific CPI indexes have a 1982-84 reference base. That is, BLS sets the average index level (representing the average price level)-for the 36-month period covering the years 1982, 1983, and 1984-equal to 100. BLS then measures changes in relation to that figure. An index of 110, for example, means there has been a 10-percent increase in price since the reference period; similarly, an index of 90 means a 10-percent decrease. Movements of the index from one date to another can be expressed as changes in index points (simply, the difference between index levels), but it is more useful to express the movements as percent changes. This is because index points are affected by the level of the index in relation to its reference period, while percent changes are not.

Here is the full FAQ answer to "what is an index?" from the BLS

This is mostly so I remember to print it out tomorrow morning:

Relative weights of the components of the CPI

EPI: State and Local Public Employees Undercompensated

2010-09-15T13:53:00.002-04:00

I wonder how much adjunct faculty factored into this (By way of Economist's View):

EPI: State and Local Public Employees Undercompensated

http://economistsview.typepad.com/economistsview/2010/09/epi-state-and-local-public-employees-undercompensated.html

A new study from the EPI says that once you control for differences between public and private sector employees, public sector employees are, on average, undercompensated:

State and local public employees undercompensated, EPI study finds: State and local public employees are undercompensated, according to a new Economic Policy Institute analysis. The report, Debunking the Myth of the Overcompensated Public Employee: The Evidence by Labor and Employment Relations Professor Jeffrey Keefe of Rutgers University, finds that, on average, state and local government workers are compensated 3.75% less than workers in the private sector.

The study analyzes workers with similar human capital. It controls for education, experience, hours of work, organizational size, gender, race, ethnicity and disability and finds that, compared to workers in the private sector, state government employees are undercompensated by 7.55% and local government employees are undercompensated by 1.84%. The study also finds that the benefits that state and local government workers receive do not offset the lower wages they are paid.

The public/private earnings differential is greatest for doctors, lawyers and professional employees, the study finds. High school-educated public workers, on the other hand, are more highly compensated than private sector employees, because the public sector sets a floor on compensation. The earnings floor has collapsed in the private sector.

The Political Economy Research Institute (PERI) at the University of Massachusetts, Amherst and the DC-based Center for Economic Policy Research are also releasing a study today, which echoes the national findings of Debunking the Myth of the Overcompensated Public Employee at a regional level. PERI’s report, The Wage Penalty for State and Local Government Employees in New England finds a "wage penalty" for state and local government workers in New England of almost 3%.

Pictures of Unemployment

2010-09-08T11:51:00.004-04:00

From J. Bradford DeLong:

Jobless Recovery Watch

Q: How long do jobless recoveries in the post-WWII U.S. typically last?

A: We have only had two. One lasted two and a half years. The other lasted four years. This one has, so far, lasted ten months.

From Calculated Risk:
http://www.calculatedriskblog.com/2010/09/summary-for-week-ending-sept-4th.html

Here is a graph you should all find interesting

Again from Calculated Risk:

From Calculated Risk: