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December 2008

Our New Ruling Class...

...is, according to Robert Samuelson, the mighty Center for Budget and Policy Priorities. It warps American public policy by successfully lobbying for policies that take the wealth of the deserving rich and give it to the middle class and the poor.

Robert Samuelson:

We here in Washington are anticipating a stampede of lobbyists, influence peddlers, media consultants, paid "experts" and self-styled crusaders. Who brought us this onslaught of special pleaders? Why, it's Barack Obama, the man who vowed to "change" how Washington works and banish from the political arena all those "special interests" that were depicted as a form of low-life devoid of all respectability.... The more powerful government becomes, the more lobbying there will be.... Obama's ambitions for more expansive government will promote special pleading.... Lobbyists have a bad rap.... Myth number one is that lobbying is anti-democratic, because it frustrates "the will of the people." Just the opposite is true: lobbying is an expression of democracy. We are a collection of special interests.... A second myth is that lobbying favors the wealthy... the facts contradict that.Sure, the wealthy extract privileges from government, but mainly they're its servants.... As for the poor and middle class, they do have powerful advocates. To name three: AARP for retirees and near retirees; the AFL-CIO for unionized workers; the Center on Budget and Policy Priorities for the poor...

Why oh why can't we have a better press corps?

Close down Newsweek. Close it down yesterday. Close down the Washington Post. Close it down ten years ago. Sow the furrows with salt. Each day that they dirty more paper with their garbage is an offense against Nature and Nature's God!


The Fed Still Has Plenty of Ammunition

Two questions: How effective has Federal Reserve policy been over the past fifteen months? And how effective can Federal Reserve policy be looking forward?

Rick Mishkin's view:

The Fed Still Has Plenty of Ammunition: There is a common view that the Federal Reserve's monetary policy has been ineffective, akin to "pushing on a string." Aggressive monetary policy easing during the recent financial crisis has, after all, been unable to lower the cost of credit or increase its availability to households and businesses.... This perspective is dangerous because it leads to the conclusion that... all that aggressive easing of monetary policy does is weaken the credibility of the central bank with regard to inflation without stimulating the economy.

Is this true?... [A]sk yourself: What if the Fed had not cut rates during the current crisis?... Tighter monetary policy would then have made an adverse feedback loop more likely: The greater uncertainty about asset values would raise credit spreads, causing economic activity to contract further, thereby creating more uncertainty, making the financial crisis worse, causing the economic activity to contract further, and so on. If the Fed had not aggressively cut rates, the result would have been both higher interest rates on Treasury securities and a substantial increase in credit risk on other assets.... [N]ot only has monetary policy been effective during the current financial crisis, it has been even more potent than during normal times.... This does not mean that monetary policy alone can offset the contractionary effect of the current massive disruption in the credit markets. The financial crisis has led to such a widening of credit spreads and tightening of credit standards that aggressive monetary policy easing has not been enough to contain the crisis. This is why the Fed and other central banks have provided liquidity support.... Even though the Fed's liquidity injections, which have expanded the Fed balance sheet by well over a trillion dollars, have been extremely useful in limiting the negative impacts of the financial crisis, they have not been enough. A fiscal stimulus package is needed....

The fact that monetary policy is more potent than during normal times argues for even more aggressive easing during financial crises. By easing aggressively to offset the negative effects of financial turmoil on economic activity -- this includes cutting interest rates preemptively, as well as using nonconventional monetary policy tools if interest rates fall to zero -- monetary policy can reduce the likelihood that a financial disruption might set off an adverse feedback loop.... The most dangerous aspect of the belief that monetary policy is ineffective during financial crises is that it may promote policy inaction when action is most needed...


Monkeys Trade Assets I

Path Finder

Virginia Postrel writes:

Pop Psychology: For more than two decades, economists have been running versions of the same experiment. They take a bunch of volunteers, usually undergraduates but sometimes businesspeople or graduate students; divide them into experimental groups of roughly a dozen; give each person money and shares to trade with; and pay dividends of 24 cents at the end of each of 15 rounds, each lasting a few minutes. (Sometimes the 24 cents is a flat amount; more often there’s an equal chance of getting 0, 8, 28, or 60 cents, which averages out to 24 cents.) All participants are given the same information, but they can’t talk to one another and they interact only through their trading screens. Then the researchers watch what happens.... “The fundamental value is unambiguously defined,” says the economist Charles Noussair, a professor at Tilburg University, in the Netherlands, who has run many of these experiments. “It’s the expected value of the future dividend stream at any given time”: 15 times 24 cents, or $3.60 at the end of the first round; 14 times 24 cents, or $3.36 at the end of the second; $3.12 at the end of the third; and so on down to zero. Participants don’t even have to do the math. They can see the total expected dividends on their computer screens....

The trading price should stick close to the expected value. At least that’s what economists would have thought before Vernon Smith, who won a 2002 Nobel Prize for developing experimental economics, first ran the test in the mid-1980s. But that’s not what happens. Again and again, in experiment after experiment, the trading price runs up way above fundamental value. Then, as the 15th round nears, it crashes. The problem doesn’t seem to be that participants are bored and fooling around. The difference between a good trading performance and a bad one is about $80 for a three-hour session, enough to motivate cash-strapped students to do their best....

Experimental bubbles are particularly surprising because in laboratory markets that mimic the production of goods and services, prices rise and fall as economic theory predicts, reaching a neat equilibrium where supply meets demand. But like real-world purchasers of haircuts or refrigerators, buyers in those markets need to know only how much they themselves value the good. If the price is less than the value to you, you buy. If not, you don’t, and vice versa for sellers. Financial assets, whether in the lab or the real world, are trickier to judge: Can I flip this security to a buyer who will pay more than I think it’s worth?... Based on future dividends, you know for sure that the security’s current value is, say, $3.12. But—here’s the wrinkle—you don’t know that I’m as savvy as you are. Maybe I’m confused. Even if I’m not, you don’t know whether I know that you know it’s worth $3.12. Besides, as long as a clueless greater fool who might pay $3.50 is out there, we smart people may decide to pay $3.25 in the hope of making a profit.... Noussair... “if you put people in asset markets, the first thing they do is not try to figure out the fundamental value. They try to buy low and sell high.” That speculation creates a bubble.

In fact, the people who make the most money in these experiments aren’t the ones who stick to fundamentals. They’re the speculators who buy a lot at the beginning and sell midway through, taking advantage of “momentum traders” who jump in when the market is going up, don’t sell until it’s going down, and wind up with the least money at the end. (“I have a lot of relatives and friends who are momentum traders,” comments Noussair.) Bubbles start to pop when the momentum traders run out of money and can no longer push prices up...


New York Times Crashed-and-Burned Watch (CRA Edition)

And everytime I ask myself "am I being too hard on the New York Times?" they do something that convinces me that the answer to that question is a simple "NO!!"

Outsourced to Barry Ritholtz:

More CRA Idiocy | The Big Picture: Howard Husock has an exercise in cognitive dissonance in today’s NYT Op-Ed pages titled Housing Goals We Can’t Afford, and it begins:

The national wave of home foreclosures, many concentrated in lower-income and minority neighborhoods, has created a strong temptation to find the villains responsible.

What can you say about an Op-Ed whose very first sentence is a giant pile of steaming bullshit? That statement is demonstrably false. As the prior post on foreclosures shows, the concentration is mostly middle class and upper middle class white suburban neighborhoods. California leads the nation in foreclosures. The state’s foreclosure activity was up 51% from a year ago. These are not CRA communities, they are what were hoped to be surburban bedroom communities east of the major cities (San Diego and L.A.) Next up is Florida; The state’s foreclosure activity was still up 68 percent from November 2007. The enormous overbuilding of Condos, and not CRA, is to blame. These weren’t inner city loans to minorities, as Dan Gross pointed out, they were “WCI Communities — builder of highly amenitized condos in Florida (no subprime purchasers welcome there)” WCI filed for bankruptcy in August. “Very few of the tens of thousands of now-surplus condominiums in Miami were conceived to be marketed to subprime borrowers, or minorities—unless you count rich Venezuelans and Colombians as minorities.”...

Let’s put some context around what the CRA  is and isn’t.

In the 1960s and 70s, banks would redline neighborhoods. They would literally put a map on a wall, and with a red magic marker, draw a redline enveloping certain neighborhoods. If you lived within the redlined areas, regardless of your income, credit score, assets, debt servicing ability, if you were in the redlined area you could not qualify for a mortgage.... There were two main aspects of the CRA: First, it required banks to apply the same lending criteria in all communities. Credit Score, Loan-to-value, percentage of monthly take home, etc. had to be the same across different areas. Second, the Community Reinvestment Act required banks to make good faith attempts to loan the money back to its own depositors. If you open up a branch in Harlem, you cannot suck up all the local business and residents’ cash, and then turn around and only lend it out to Tribeca condo buyers. You must make a fair attempt to loan the money locally. Banks have no obligation to open branches in Harlem, but if they did, they are required to at least try to lend the locals back their own money. Note that there are no quotas, minimums or mandates. This is a very soft rating system.

The rest of Husock’s article is filled with the usual dissembling and half-truths. He mentions “in 1995 the Clinton administration added tough new regulations,” but omits any mentions that the Bush administration substantially watering down the act in 2004.... Why was there no credit/housing meltdown from 1977 to 2005? Why did 30 other countries, none of which have are covered by the CRA, have a remarkably similar housing boom and bust to the USA?  Husock’s arguments not only fail legally and factually, they also fail in terms of time and space . . .


Washington Post Crashed-and-Burned Watch (David Farenthold Edition)

Everytime I ask myself "Am I being too hard on the Washington Post" someone like staff writer David Farenthold comes along, and I conclude that I am not--that it is, in fact, worse than I can imagine.

Outsourced to Jonathan Zasloff:

A Spit-out-your-coffee Moment: From the Washington Post's article on Obama's environment and energy team, which includes the new National Energy Council to be run by Carol Browner (emphasis added):

Ed Krenik, who worked as the EPA's liaison to Congress for two years under Bush, said he worried that Browner's new role could upset government scientists if it is seen as a deadening layer of bureaucracy. "If there's a concern out there, it's probably concern amongst EPA staff" that their director would have a less direct line to Obama, Krenik said.

Oh yes--the Bush Administration is just so worried about the concerns of EPA's professional staff!

You mean the administration that silenced the director of the Goddard Laboratory? The Administration that put someone without a college degree in charge of that laboratory? The administration that hired an oil company lobbyist to run the Council on Environmental Quality? Who then rewrote the scientists' report? The administration whose flunkies at Interior altered scientific field reports and forwarded confidential e-mails to industry lobbyists? The Administration whose spokesman said that it was arrogant to assume that we should keep the current climate?

Why is anyone even bothering to interview these jokers?

Because informing his readers is the last thing on the mind of David Farenthold--or of his editors.


Department of "Huh?"

Alex Berenson and Diana Henriques:

Now Accused of Fraud, Wall St. Wizard Had His Skeptics: The collapse of Mr. Madoff’s firm is yet another blow in a devastating year for Wall Street and investors. While Mr. Madoff’s firm was not a hedge fund, the scope of the fraud is likely to increase pressure on hedge funds to accept greater regulation and transparency and protect their investors...

Five paragraphs later:

Mr. Madoff was not running an actual hedge fund, but instead managing accounts for investors inside his own securities firm. The difference, though seemingly minor, is crucial. Hedge funds typically hold their portfolios at banks and brokerage firms like JPMorgan Chase and Goldman Sachs. Outside auditors can check with those banks and brokerage firms to make sure the funds exist...

Surely this is an argument for more hedge funds? For more separation of portfolio and custodial functions?


Why Is Africa Poor?

Chris Blattman asks for advice and help with his syllabus:

http://www.chrisblattman.org/Syllabus.pdf Why is Africa poor and what (if anything) can the West do about it?

Instructor: Chris Blattman, Departments of Political Science & Economics, christopher.blattman@yale.edu  

Purpose and Nature of the Course: In the 1960s, Africa’s future looked bright. This optimism was extinguished, however, by four decades of disappointing growth, failing states, corrupt regimes, widespread poverty and famine, and high levels of violence and civil war. Decades of fiveyear plans, foreign aid flows, military expeditions, and humanitarian interventions seem to have had little impact, and perhaps even a negative one.

Today, hope for growth and stability is again flourishing in Africa. Civil wars are dwindling, more of the continent is democratic than ever, and many countries have sustained modest growth rates for almost a decade. There are new private foundations, pledges to increase foreign aid, African and UN intervention forces, and books claiming that the end of poverty is within our grasp. The West is capable of saving Africa, according to some. Africa will grow and prosper in spite of the West, according to others. Still others fear that expectations and growth are about to come crashing down again as African and Western government repeat the mistakes of the past. 

Why is Africa poor? What, if anything, can the West do about it? No course can answer these questions in full, but one can get started on the (hopefully lifelong) learning. Students will be exposed to the major and the not‐so-major debates in aid and development. They will discuss the conventional and less conventional theories of  poverty, growth, war and good governance, and why there is so much or so little of it in Africa. The aim is to help students think critically about these debates and their possible role in the problem and solutions. 


One of these days in your travels, a guy is going to show you a brand-new deck of cards on which the seal is not yet broken. Then this guy is going to offer to bet you that he can make the jack of spades jump out of this brand-new deck of cards and squirt

Paul Wilmott dresses the wisdom of Sky Masterson up in academic garb:

Paul Wilmott's Blog: Magicians And Mathematicians: We've learned the hard way how important it is to measure and manage risk. Despite the thousands of mathematics and science PhDs working in risk management nowadays we seem to be at greater financial and economic risk than ever before. To show you one important side of banking I'd like you to follow me in an exercise with parallels in risk management.

You are in the audience at a small, intimate theatre, watching a magic show. The magician hands a pack of cards to a random member of the audience, asks him to check that it's an ordinary pack, and would he please give it a shuffle. The magician turns to another member of the audience and asks her to name a card at random. "Ace of Hearts," she says. The magician covers his eyes, reaches out to the pack of cards, and after some fumbling around he pulls out a card. The question to you is what is the probability of the card being the Ace of Hearts?... [Y]ou already have an answer? What is that, one in fifty two, you say? On the grounds that there are 52 cards in an ordinary pack. It certainly is one answer. But aren't you missing something, possibly crucial, in the question? Ponder a bit more....

You have another answer for me already? You'd forgotten that it was a magician pulling out the card. Well, yes, I can see that might make a difference. So your answer is now that it will be almost 100% that the card will be the Ace of Hearts, the magician is hardly going to get this trick wrong. Are you right? Well, think just a while longer....

Are those the only two possible answers? Either one in 52 or 100%? Suppose that you had billions of dollars of hedge fund money riding on the outcome of this magic trick would you feel so confident in your answers? When I ask this question of finance people I usually get either the one in 52 answer or the 100%. Some will completely ignore the word 'magician,' hence the first answer. Some will say "I'm supposed to give the maths answer, aren't I? But because he's a magician he will certainly pick the Ace of Hearts." This is usually accompanied by an aren't-I-clever smile! Rather frighteningly, some people trained in the higher mathematics of risk management still don't see the second answer even after being told....

[W]hen I first heard this question an obvious answer to me was zero. There is no chance that the card is the Ace of Hearts. This trick is too simple for any professional magician. Maybe the trick is a small part of a larger effect, getting this part 'wrong' is designed to make a later feat more impressive... the Ace of Hearts is later found inside someone's pocket. Or maybe on the card are written the winning lottery numbers that are drawn randomly 15 minutes later on live TV. Or maybe the magician was Tommy Cooper. Or it was all the magician's performance-anxiety dream the night before....

A member of wilmott.com didn't believe me when I said how many people get stuck on the one in 52 answer, and can't see the 100% answer, never mind the more interesting answers. He wrote "I can't believe anyone (who has a masters/phd anyway) would actually say 1/52, and not consider that this is not...a random pick?" So he asked some of his colleagues the question, and his experience was the same as mine. He wrote "Ok I tried this question in the office (a maths postgraduate dept), the first guy took a fair bit of convincing that it wasn't 1/52!, then the next person (a hardcore pure mathematician) declared it an un-interesting problem, once he realised that there was essentially a human element to the problem! Maybe you have a point!" Does that not send shivers down your spine? It does mine...


Picked the Wrong Week to Give Up...

Calculated Risk:

Calculated Risk: Retail Sales Off Sharply in November: The Census Bureau reports that retail sales collapsed in October:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for November, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $355.7 billion, a decrease of 1.8 percent from the previous month and 7.4 percent below November 2007. Total sales for the September through November 2008 period were down 4.5 percent from the same period a year ago. The September to October 2008 percent change was revised from -2.8 percent to -2.9 percent.

Retail trade sales were down 2.0 percent from October 2008 and were 8.5 percent below last year. Motor vehicle and parts dealers sales were down 25.2 percent from November 2007 and gasoline stations sales were down 22.0 percent from last year.


Management by... Something or Other

Joel Spolsky:

Amnesia - Joel on Software: I’m turning into one of those crazy bosses that approves things, and then gets upset when you do them. This keeps happening. I must be driving people crazy.... The solution, of course, is what I’ve been saying all along. STOP FRIGGIN’ LISTENING TO ME. I don’t know what I’m talking about. If you work for me, you’re welcome to get my advice, but you have to make your own decision because chances are you’ve thought MUCH MORE about the issue than I have and in fact we probably hired you because you’re smarter than I am.


On Track to the Worst Downturn since WWII

Reuters:

Jobless Claims at 26-Year High; Import Prices Fall: The number of U.S. workers filing new claims for jobless benefits surged to a 26-year high last week, Labor Department data showed on Thursday, as a deepening recession forced employers to cut back on hirings.... And the U.S. trade deficit widened unexpectedly in October as imports from China rose to a new record and oil imports rebounded as prices fell by a record amount, a Commerce Department report showed.

Initial claims for state unemployment insurance benefits jumped by 58,000, the biggest increase since September 2005, to a seasonally adjusted 573,000 in the week ended Dec. 6 from an upwardly revised 515,000 the previous week. That was the highest print since November 1982, when 612,000 workers submitted new claims for unemployment benefits. A Labor Department official said there were no special factors influencing the report. Analysts polled by Reuters had forecast 525,000 new claims versus a previously reported figure of 509,000 the week before. The four-week moving average of new jobless claims, a better gauge of underlying labor trends because it smoothes out week-to-week volatility, rose to 540,500 from 526,250 the prior week, the highest since Dec. 18, 1982 when a reading of 554,500 was recorded.

Continuing claims jumped to 4.43 million in the week ended Nov. 29, also a 26-year high, from 4.09 million the previous week. The 338,000 increase in continuing claims matched the gain recorded in the week ended Nov. 30, 1974...


The Cucumber Factor

Matthew Yglesias:

Matthew Yglesias: The Cucumber Factor: Ta-Nehisi Coates is getting ready to foreswear the smear against white people that we eat cucumber. And yet just yesterday here in Finland where the white people are twice as white as back home (Nordic ancestry + subarctic winter = pale), I was in fact served a sandwich of cucumbers and cheese on a croissant.

And here in Vienna while seated next to Dani Rodrik I was just served not a cucumber sandwich but an egg salad sandwich on white bread with the crusts removed.

It did have Hungarian peppers on it. And the Hungarians do claim to be Huns, after all--name their children Attila, et cetera...


A Plea for the Canada Plan

Rootless (or is that "ruthless"?) cosmopolite Gideon Richman calls for world peace through world law. And Matt Drudge sics the Republican base on him:

Covered in internet slime: I knew that there was something odd going on, when I woke up at 7am on Tuesday and found that over 200 e-mails had arrived in the seven hours that I had been in bed. It turned out that my article on world government had been “Drudged.”... The following from Tommy101d@aol.com is fairly typical: “Just wanted to let you know that you’re never gonna get your New World Order. People are waking up everyday to what’s really going on.... Good luck gettin’ the guns you traitor piece of trash!!”

If you get two e-mails like that it can be faintly unsettling. If you get two hundred, however, you begin to get used to it. That said, the whole experience has given me an insight into the mindset of the gun-toting, bible-bashing, nationalistic bit of the United States. Here are my conclusions.

  1. There is an unbelievable amount of anger and hatred out there - directed at everything from the UN to big business to Barack Obama. These people can read, but they cannot think.

  2. The “End of Days” crowd is very strong. I would say that about a third of the e-mails I got referred me to the Book of Revelations - in which, apparently, it is all foretold. In an idle moment, I e-mailed one of my correspondents back and said that I have never read Revelations, since I am an athiest. Big mistake.

  3. There are a lot of people who believe not only that global warming is a hoax - but that it is actually a conspiracy. The fact that the most influential reports on climate change have been produced by an intergovernmental panel (IPCC) - sponsored by the UN - fuels this theory. The idea is that the UN is perpetuating a climate-change hoax, to provide an excuse to impose a world government on America. I’m all part of it apparently.

  4. I can see what Obama means by referring to “bitter” people clinging to guns and religion. And clinging is the word. Several people informed me that I would only remove their guns “from my cold, dead hands.”

I am disappointed, however, that Gideon continues to pull his punches. He does not endorse my call for immediate execution of the Canada Plan--the conquest of Canada by the United States in order to transform America's median voter from someone in a pickup truck and a gunrack outside of Nashville to someone who takes mass transit and likes socialized medicine in Toronto.

Perhaps now that he has been Drudged, Gideon will wake up to the urgency of the Canada Plan.


Is TypePad Saying that It Has Broken My China and Is Now Painstakingly Glueing It Back Together?

I find this hard to understand:

Everything TypePad: A quick update on migration: We’ve had great feedback from the community about enhancements we’ve made to TypePad. We also know some of you are still patiently waiting to see the new features. The TypePad migration is kind of like moving out of a house and into a new one. If you've been in a house for a long time, it's going to take you longer to pack everything up and move it. Much the same with some of our favorite, longer-term bloggers. We're being really careful with "packing up" your data and metadata - posts and photos, links, comments, trackbacks and all the other elements that make your blog great. We know how important your blog is to you, so we want to be certain we're moving everyone quickly and carefully. One of the best benefits of TypePad is that we handle all the moving and upgrades for you. We're so happy you've chosen to blog with us. If there's a way we can show our appreciation to you, please let us know in the comments.


On the Defects of Mark-to-Market Accounting

Steve Ross explains some things to me:

  • If you believe in organizational capital--in goodwill--in the value of the enterprise's skills, knowledge, and relationships as a source of future cash flows--than marking it to market as if that organizational capital had no value is the wrong thing to do.
    • Especially as times in which asset values are disturbed and impaired are likely to be times when the value of that organizational capital is highest.
  • If you believe in mean reversion in risk-adjusted asset values, mark-to-market accounting is the wrong thing to do.
  • If you believe that transaction prices differ from risk-adjusted asset values--perhaps because transaction prices are of particular assets that are or are feared to be adversely selected and hence are not representative of the asset class--than mark-to-market accounting is the wrong thing to do.
  • If you believe that changes in risk-adjusted asset values are unpredictable, but also believe:
    • in time-varying required expected returns do to changing risk premia;
    • that an entity's own cost of capital does not necessarily move one-for-one with the market's time-varying risk premia;
    • then mark-to-market accounting is the wrong thing to do.

On Not Making the Same Mistakes We Made in the Great Depression

J. Bradford DeLong (2008), "On Not Making the Same Mistakes We Made in the Great Depression," OKB Roundtable, December 11-12 2008.

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Ask the Internet: Berkeley High-End Lunch Restaurants

So at the start of the semester I took Jim Hines (visiting from U. Michigan as we try to persuade him and his family to leave his underfunded public university in a place with absurdly low house prices for another underfunded public university in a place with absurdly high house prices) out to lunch at Adagia.

At the end of the semester he has escalated by taking me out to lunch at Chez Panisse Cafe.

I now have to re-escalate next semester. But to what? I don't believe the French Laundry serves lunch--and it is a Berkeley restaurant only by pure legal fiction. What are my other options?


Why Oh Why Can't We Have Hotter Hotel Showers?

If a hotel shower cannot put out enough steam to de-wrinkleify a dress shirt in ten minutes, what good is it?

(Yes, I know Goddess made travel irons. But with my back I'm not going to lug a travel iron around the world.)


UPDATE: A correspondent writes:

Maybe this will provide enough steam: http://www.nytimes.com/2008/12/11/opinion/11husock.html?ref=opinion

I don't dare click on the link...


David Leonhardt on the U.S. Auto Industry

And the $73 an hour figure fraud:

Figure Skews Debate of a Bailout for Detroit: Big Three workers aren’t making anything close to $73 an hour (which would translate to about $150,000 a year). But... General Motors, Ford and Chrysler workers make significantly more than their counterparts at Toyota, Honda and Nissan plants in this country.... And yet the main problem facing Detroit, overwhelmingly, is not the pay gap. That’s unfortunate because fixing the pay gap would be fairly straightforward. The real problem is that many people don’t want to buy the cars that Detroit makes. Fixing this problem won’t be nearly so easy. The success of any bailout is probably going to come down to Washington’s willingness to acknowledge as much.

Let’s start with the numbers. The $73-an-hour figure comes from the car companies themselves... wages, overtime and vacation pay, and comes to about $40 an hour... fringe benefits, like health insurance and pensions... $15 an hour or so. Add the two together, and you get the true hourly compensation of Detroit’s unionized work force.... Honda’s or Toyota’s (nonunionized) workers... make in the neighborhood of $45 an hour, and most of the gap stems from their less generous benefits.

The third category is the cost of benefits for retirees... companies add them into the mix... this $15 isn’t mainly a reflection of how generous the retiree benefits are. It’s a reflection of how many retirees there are....

[H]ere’s a little experiment. Imagine that a Congressional bailout effectively pays for $10 an hour of the retiree benefits... the U.A.W. agrees to reduce pay and benefits for current workers to $45 an hour — the same as at Honda and Toyota. Do you know how much that would reduce the cost of producing a Big Three vehicle? Only about $800.... An extra $800 per vehicle would certainly help Detroit, but the Big Three already often sell their cars for about $2,500 less than equivalent cars from Japanese companies....

Detroit’s defenders, from top executives on down, insist that they have finally learned their lesson.... But Congress and the Obama administration shouldn’t fool themselves into thinking that they can preserve the Big Three in anything like their current form. Very soon, they need to shrink to a size that reflects the American public’s collective judgment about the quality of their products.

It’s a sad story, in many ways. But it can’t really be undone at this point. If we had wanted to preserve the Big Three, we would have bought more of their cars.


John Markoff Wrings His Hands About Computer Security

John Markoff tiptoes around the easiest thing we could do to improve computer security: switch to unix-based systems:

Thieves Winning Online War, Maybe Even in Your Computer: SAN FRANCISCO — Internet security is broken, and nobody seems to know quite how to fix it. Despite the efforts of the computer security industry and a half-decade struggle by Microsoft to protect its Windows operating system, malicious software is spreading faster than ever. The so-called malware surreptitiously takes over a PC and then uses that computer to spread more malware to other machines exponentially. Computer scientists and security researchers acknowledge they cannot get ahead of the onslaught....

The sophistication of the programs has in the last two years begun to give them almost lifelike capabilities. For example, malware programs now infect computers and then routinely use their own antivirus capabilities to not only disable antivirus software but also remove competing malware programs. Recently, Microsoft antimalware researchers disassembled an infecting program and were stunned to discover that it was programmed to turn on the Windows Update feature after it took over the user’s computer. The infection was ensuring that it was protected from other criminal attackers.... Microsoft has monitored a 43 percent jump in malware removed from Windows computers just in the last half year.

The biggest problem may be that people cannot tell if their computers are infected because the malware often masks its presence from antivirus software. For now, Apple’s Macintosh computers are more or less exempt from the attacks, but researchers expect Apple machines to become a larger target as their market share grows...

I wonder why?


Atlantic Monthly Crashed-and-Burned Watch (Caitlin Flanigan Edition)

The Fifteen-Year-Old says that the Atlantic Monthly's review of Twilight gets plot points wrong--evidence of a much-too-hasty skim of the book--and that she for one is sick of right-wing women who try to gain points with right-wing men by saying that women are stupid in the pages of right-wing magazines.

It's Caitlin Flanigan:

What Girls Want - The Atlantic (December 2008).

"Why do we subscribe to the Atlantic?" she asks...


Treasurys Up; Government Sells T-bills at 0%

Wow:

Treasurys up; government sells T-bills at 0% - MarketWatch: Treasurys higher as bad news creeps in Government sells short-term bills to yield zero: By Deborah Levine, MarketWatch: Last update: 2:44 p.m. EST Dec. 9, 2008: NEW YORK (MarketWatch) -- Treasurys headed higher Tuesday, helped by a strong bill auction that showed investors purely wanted assurance that they would get their principal back.

The market reached the highs of the day after the Treasury Department sold $32 billion in four-week bills at a yield of 0%.


Analyze Like It's 1939

You know, if you thawed out a bunch of macroeconomists who had been cryogenicslly frozen since 1939--they would be cutting edge. Where does Paul Krugman say he kept falling further and further behind the cutting edge until one day he woke up and learned that all along he had been doing state-of-the-art behavioral game theory?


I Don't Envy David Romer

Wednesday he is supposed to give a lecture on the "Great Moderation" of the business cycle--on the fact that from World War II to 1984 we had one recession every six years and yet since 1984 we have had only one recession every twelve years (and somewhat smaller recessions at that).

The problem is that the Great Moderation may no longer be a fact after next June...


Roy Edroso Looks into the Abyss of Stupidity

Roy Edroso reads Ann Althouse and Glenn Reynolds so the rest of us do not have to:

alicublog: NOT ROCKET SCIENCE. Ann Althouse is angry about the "fluorescent bulbs that Obama and his cadre of environmentalists are about to foist on us all," and at his notion that we can save money by using them in government buildings: "Light bulbs first. They're supremely important! They will save us all! Light bulbs!" The Ole Perfesser agrees. "Sorry, but this kind of wonky no-sacrifice fixit nostrum reminds me of Al Gore, or Jimmy Carter’s sweaters, and I don’t think it’ll play well, or deliver as promised."

Even Popular Mechanics -- whose authority the Perfesser usually accepts -- testifies that the average American home would save $180 per year by switching to CFLs. Since we're living under oppressive big government, which must employ hundreds of thousands of lightbulbs, going to fluorescents to save money seems like common sense. But that's been unpopular with Althouse and the Perfesser for a long time.

Meantime Dr. Mrs. Ole Perfesser, a global warming skeptic, has been convinced by a report that pollution may be increasing female vs. male births -- and her own observation "that it seems like there are more girl babies and just girls in general wherever I go" -- to call for "more research and attempts to address this problem." Once Obama establishes his Chief Technology Office I'm sure they'll be demanding a NASA-scale program for eternal life.


And We Are Live at the San Francisco Chronicle...

Review of 'Panic!,' edited by Michael Lewis:

Review of 'Panic!,' edited by Michael Lewis: The Story of Modern Financial Insanity: W.W. Norton; 391 pages; $27.95:

Over the past 16 months, the financial crisis of 2007-9 has gone from a potential worry to a cold to the flu to galloping pneumonia. And now W.W. Norton publishes a book with Michael Lewis' name on the cover that tells us that we should PANIC! Don't think that this is a book written by the smart, thoughtful, lively and witty Michael Lewis, who made his reputation with "Liar's Poker," his memoir of working as a bond salesman on Wall Street in the 1980s. Only eight of the 50-odd short-form pieces collected in the near-400 pages of this book are by Lewis. Do think of this as Lewis' answer to the question: What good, short and comprehensible things should I read if I want to understand our modern financial crisis? And Lewis' answer is a very good one: He has an excellent eye, and what he likes, we readers will like as well - at least if we like to read him, and I do.

Over the past quarter century we have seen some half-blown (Mexico, saving and loans) and four full-blown financial panics: the portfolio-insurance U.S. stock market panic of October 1987, the East Asian financial crisis of 1997-8, the 2000-2001 collapse of the dot-com bubble and the current real-estate-triggered mess. Lewis collects the newspaper and short magazine pieces on each of these four that he thinks offer the most insight and interest, and packages them in a book. It's very handy, very readable - and you can learn a huge amount.

My one serious complaint is that it is a book. That means that only one-tenth of the material comes from 2008 - the last-written piece was first published on April 27. A lot has happened since then. Right now I have the book at my left hand and my laptop at my right, with one window open to one of Lewis' Bloomberg columns about the crisis (links.sfgate.com/ZFPG) and another open to his excellent piece of reportage "The End of Wall Street's Boom" for the December issue of Portfolio (links.sfgate.com/ZFPL). As a person interested in the panic now and in the future, I find my computer more interesting. On the other hand, I can take the book into the bathtub - so it still has one key edge, even though its production process sacrifices timeliness.

What is Lewis' take on the current crisis? His first arresting point is that this is something that we have done to ourselves rather than something that shadowy villains have done to us. "The striking thing ..." he writes, "is how egalitarian it has been. ... Stan O'Neal, the former CEO of Merrill Lynch, was fired for the same reason the lower-middle-class family in the suburban wasteland between Los Angeles and San Diego may have lost its surprisingly nice home. Both underestimated the likelihood of an unlikely event: a financial panic. ... The small army of Wall Street traders ... look as naive and foolish as the man on the street. ... The man on the street ... acted on the same foolish principles that have guided ... Wall Street traders."

His second arresting point is that all of the attempts to manage risk have done so by applying a mathematical theory of finance that is guaranteed to break down when a panic actually comes and when real risk is there to be managed. Lewis quotes John Seo of Fremont Capital saying: "It's hard to believe that anyone - yes, even me - ever believed it [the theory]. It's like trying to [replace] a fire-insurance policy by dynamically increasing or decreasing your coverage [bet that there will be a fire] as fire conditions wax and wane. One day, bam, your house is on fire, and you call for [someone to sell you] more coverage?"

His third arresting point is that it was the confidence that the models could manage risk that has in fact created the kinds and sizes of risk that the models certainly cannot manage.

The hope is that the fallout will be relatively small. A few million homeowners who thought they were building equity and find instead that they were running risks that they had no business running and have really been renting - some cheaply and some expensively - for the past few years. Rather more investors nearing retirement who find that the S&P index funds in their 401(k) accounts are worth only half what they expected 18 months ago. Some princes of Wall Street with still-outsize fortunes that are much smaller than they had gotten used to looking forward to. Some tens of thousands of yuppies expecting high-paying finance jobs who find that they are not there. And a few million more workers unemployed for a year or two than if we had regulated our financial markets properly and so headed off the possibility of this crisis before it came to pass.

The hope is that the government has the tools and the energy and the smarts to keep this a garden-variety recession - and not let it turn into a semi-great or even a small depression.

That's the hope.

J. Bradford DeLong is a professor of economics at UC Berkeley, a research associate of the National Bureau of Economic Research and a former deputy assistant secretary of the Treasury. E-mail him at books@sfchronicle.com.

This article appeared on page M - 1 of the San Francisco Chronicle


Liquidity, Default, Risk

We are live at Cato Unbound:

Cato Unbound: Liquidity, Default, Risk:


Liquidity, Default, Risk

**J. Bradford DeLong
University of California at Berkeley and NBER
brad.delong@gmail.com; http://delong.typepad.com; 925-708-0467

December 6, 2008

Larry White is the Best of the Austrians—the most persuasive, the most thoughtful, and the most knowledgeable of the economists working in the Austrian monetary theory tradition, which is an essential part of our collective diversified intellectual portfolio in our age in which economic theory is so underdeveloped that, as John Maynard Keynes wrote in an earlier and somewhat similar episode, “[w]e lack more than usual a coherent scheme…. All the political parties alike have their origins in past ideas and not in new ideas…. It is not necessary to debate the subtleties of what justifies a man in promoting his gospel by force; for no one has a gospel…”

Nevertheless, I think that what Larry White has written misses the big point about what really has happened. So let me try to lay out what the situation looks like to me:

Think of it this way: two years ago we lived in a world in which the wealth of global owners of capital was some $80 trillion—that was the market value of all of their property rights to dividends and contract rights to interest, rent, royalties, options, and bonuses. Now over time the wealth of global capital fluctuates, and it fluctuates for five reasons:

  1. Savings and Investment: Savings that are transformed to the investment add to the productive physical—and organizational, and technological, and intellectual—capital stock of the world. This is the first and in the long run the most important source of fluctuations—in this case, growth—in global capital wealth.

  2. News: Good and bad news about resource constraints, technological opportunities, and political arrangements raise or lower expectations of the cash that is going to flow to those with property and contract rights to the fruits of capital in the future. Such news drives changes in expectations that are a second source of fluctuations in global capital wealth.

  3. Liquidity Discount: The cash flowing to capital arrives in the present rather than the future, and people prefer—to varying degrees at different times—the bird in the hand to the one in the bush that will arrive in hand next year. Fluctuations in this liquidity discount are a third source of fluctuations in global capital wealth.

  4. Default Discount: Not all the deeds and contracts will turn out to be worth what they promise or indeed even the paper that they are written on. Fluctuations in the degree to which future payments will fall short of present commitments are yet a fourth source of fluctuations in global capital wealth.

  5. Risk Discount: Even holding constant the expected value and the date at which the cash will arrive, people prefer certainty to uncertainty. A risky cash flow with both upside and downside is worth less than a certain one by an amount that depends on global risk tolerance. Fluctuations in global risk tolerance are the fifth and final source of fluctuations in global capital wealth.

In the past two years the wealth that is the global capital stock has fallen in value from $80 trillion to $60 trillion. Savings has not fallen through the floor. We have had no little or no bad news about resource constraints, technological opportunities, or political arrangements. Thus (1) and (2) have not been operating. The action has all been in (3), (4), and (5).

As far as (3) is concerned, the recognition that a lot of people are not going to pay their mortgages and thus that a lot of holders of CDOs, MBSs, and counterparties, creditors, and shareholders of financial institutions with mortgage-related assets has increased the default discount by $2 trillion. And the fact that the financial crisis has brought on a recession has further increased the default discount—bond coupons that won’t be paid and stock dividends that won’t live up to firm promises—by a further $4 trillion. So we have a $6 trillion increase in the magnitude of (3) the default discount. The problem is that we have a $20 trillion decline in market values.

The problem is made bigger by the fact that for (4), the Federal Reserve, the European Central Bank, and the Bank of England have flooded the market with massive amounts of high-quality liquid claims on governments’ treasuries, and so have reduced the liquidity discount—not increased it—by an amount that I estimate to be roughly $3 trillion. Thus (3) and (4) together can only account for a $3 trillion decrease in market value. The rest of that decline in the value of global capital—all $17 trillion of it—thus comes by arithmetic from (5): a rise in the risk discount. There has been an increase in the perceived riskiness (not a fall in the expected value, an increase in the spread holding the expected value constant) of income from capital. And there has been a massive crash in the risk tolerance of the globe’s investors.

Thus we have an impulse—a $2 trillion increase in the default discount from the problems in the mortgage market—but the thing deserving attention is the extraordinary financial accelerator that amplified $2 trillion in actual on-the-ground losses in terms of mortgage payments that will not be made into an extra $17 trillion of lost value because global investors now want to hold less risky portfolios than they wanted two years ago.

From my standpoint, the puzzle is multiplied by the fact that we economists have what we regard as pretty good theories about (4) and (5), and yet those theories do not seem to work at all. As far as the liquidity discount (4) is concerned as long as we love our children as ourselves (and most of us do) and as long as we have access to and can credibly pledge collateral for financial transactions (and we can) the magnitude of the liquidity discount should be roughly equal to the technologically- and organizationally-driven rate of labor productivity growth divided by the intertemporal elasticity of substitution. The technologically- and organizationally-driven rate of labor productivity growth is a fairly steady 2 percent per year. The intertemporal elasticity of substitution is in the range from 1/2 to 1. The liquidity premium should be in the range of 2% to 4% per year in real terms—and no central bank should be able to drop it to –2% per year by a few open-market operations: big moves in the liquidity premium should require big moves in expected future growth rates of consumption. Perhaps in the old days—back when banknotes and demand deposits backed fractionally by gold or central-bank reserves were the only liquid stores of value, the only means of payment, the only mediums of exchange, or the even older days when the king’s picture on a disc of gold was it and when the torturers of the Mint and the Tower were standing by—things were different and credit expansion via the use of the seignorage power could have greater effects. But today the ability of central banks to swing the liquidity discount as they have in the past year and a half is a mystery.

Things are even worse as far as the risk discount is concerned. In normal times, our models predict, with the ability to diversify portfolios that exists today the risk discount on assets like corporate equities should be around 1% per year. It is more like 5% per year in normal times—it is more like 10% per year today. And our models for why the risk discount has taken such a huge upward leap in the past year and a half are little better than simple handwaving and just-so stories. Our current financial crisis remains largely a mystery: a $2 trillion impulse in lost value of securitized mortgages has set in motion a financial accelerator that we do not understand at any deep level that has led to ten times the total losses in financial wealth of the impulse.

Thus my dissatisfaction with Larry White’s piece: he talks only about the impulse, while it is the propagation mechanism—the financial accelerator—that is the important part of the story. $2 trillion shocks to global wealth do, after all, happen every several years, everytime there is a recession or a big rise in the prices of natural resources. But financial distress of the magnitude we see today happens once a century. Since the Bank of England developed its lender of last resort doctrine in the 1830s, we have only had two episodes this bad: the Great Depression and today.

Moreover, I do not think that Larry White has gotten the part of the story that he does cover right. I am not convinced of his account of the origins of the trouble in the housing finance market. Larry White blames government subsidies: the implicit government guarantee offered to FNMA and FHLMC, the explicit guarantee to the FHA, the requirements of the CRA, and the subsidy to borrowers provided by the Federal Reserve’s credit expansion—i.e., its open-market operations that bought Treasury bills for cash.

From the start of 2002 to the start of 2006 the Federal Reserve bought $200 billion in Treasury bills for cash. This $200 billion reduction in ourstanding bonds and increase in cash surely did lead to an increase in demand for private bonds. but recall the magnitudes here. We have $2 trillion of losses on $8 trillion in face value of mortgages that ex post should not have been made. Are we supposed to believe that $200 billion of open-market purchases by the Fed drives private agents into making $8 trillion of privately-unprofitable loans? Not likely. I can see how monetary contraction can make previously profitable loans unprofitable. But I see no way that this amount of monetary expansion can force private agents to make that amount of unprofitable loans. The magnitudes just do not match.

The requirements of the CRA also appear to me to be a red herring. Larry White writes that those who blame the crisis on greed are wrong because “greed… is always around” and you cannot explain a variable result by a constant cause “just as one can’t explain a cluster of airplane crashes by citing gravity.” I say that the same is true of the CRA. It has been around in more-or-less its current form for a generation.

FHA and FNMA and FHLMC make up the last of the actors to whom Larry White attributes the impulse—the $8 trillion in unwise mortgage loans made over the past five years. Once again the problem is that they have been around for a while. White tried to deal with this by saying that the GSEs changed their policies by cutting severely on down payment requirements—and that the private-sector mortgage lenders had no choice but to match them.

This claim provokes two immediate reactions. First, as your mother says: "If Freddie jumps off a cliff is that a good reason for you to follow him?" The answer to your mother's question is: "No." Just because GSEs are leading the market in making stupid money-losing loans did not force private financial companies to follow them and so lose their money too.

Second, Freddie and Fannie and FHA were not the first to jump off the cliff. They lost huge amounts of market share in the mid 2000s. We don't have a crisis which started when private mortgage lenders losing market share cut back on the quality of the loans they were willing to make. We have a crisis which started when private mortgage lenders cut back on the quality of the loans they were willing to make and so gained market share. The sequence is the opposite of what would have happened if White were correct.

Moreover, if ill-judged loans by the GSEs were the problem, we would expect to see a crisis in which FNMA and FHLMC failed first—which they did not, their troubles coming back in the line well after the Countrywides and the Bears Stern. And we would expect the failure of FNMA and FHLMC to take the form of them leaking cash as the number of mortgage payments they received crashed with defaults and consequent foreclosures. Instead Fannie and Freddie are still cash-flow positive—as long as they can borrow at nearly the Treasury rate. Fannie and Freddie crashed not because their revenues collapsed but because their borrowing costs ballooned. At it looks right now as though government ownership of 80 percent of Fannie and Freddie will bring money into the Treasury over the next five years.

So why does Larry White’s diagnosis of what is going on differ so much from mine? I think that what is going on is a characteristic weakness of the Austrian tradition: the baseline assumption that all evils must have their origin in some form of government misregulation. If government could be drowned in the bathtub, then an Eden in which people indulged in their natural propensity to truck, barter, and exchange would emerge. And this automatically rules out what I regard as the most likely and fruitful road to walk down to understand this financial crisis: the road that starts from investigating how human psychological limits lead to bad private-sector contract design that then magnifies psychological biases.

I am not happy with the state of such explanations—they seem to involve, at the moment, a great deal of handwaving. But in my judgment it is less handwaving than required to make the case that our current financial crisis is the result of our abandonment of a proper gold standard and our embrace of fractional-reserve banking and government-sponsored mortgage lending enterprises.

References

Lawrence White (2008), “What Really Happened?” Cato Unbound (December 2) http://www.cato-unbound.org/2008/12/02/lawrence-h-white/what-really-happened/


The "The Labor Market Is Not a Partial-Equilibrium Market" Keynes

From John Maynard Keynes's General Theory. One of the Keyneses. The Keynes who argues that the main thing wrong with classical economics is that it analyzes the labor market as though it can be analyzed in partial equilibrium:

The Postulates of the Classical Economics: [T]he other, more fundamental, objection... flows from our disputing the assumption that the general level of real wages is directly determined by the character of the wage bargain.... There may exist no expedient by which labour as a whole can reduce its real wage to a given figure by making revised money bargains with the entrepreneurs.... Though the struggle over money-wages between individuals and groups is often believed to determine the general level of real-wages, it is, in fact, concerned with a different object... the struggle about money-wages primarily affects the distribution of the aggregate real wage between different labour-groups, and not its average amount per unit of employment, which depends, as we shall see, on a different set of forces. The effect of combination on the part of a group of workers is to protect their relative real wage. The general level of real wages depends on the other forces of the economic system.

Thus it is fortunate that the workers, though unconsciously, are instinctively more reasonable economists than the classical school, inasmuch as they resist reductions of money-wages, which are seldom or never of an all-round character, even though the existing real equivalent of these wages exceeds the marginal disutility of the existing employment; whereas they do not resist reductions of real wages, which are associated with increases in aggregate employment and leave relative money-wages unchanged, unless the reduction proceeds so far as to threaten a reduction of the real wage below the marginal disutility of the existing volume of employment....

We must now define the third category of unemployment, namely "involuntary" unemployment in the strict sense, the possibility of which the classical theory does not admit.... [I]t will be convenient to exclude "frictional" unemployment from our definition of "involuntary" unemployment. My definition is, therefore, as follows: Men are involuntarily unemployed if, in the event of a small rise in the price of wage-goods relatively to the money-wage, both the aggregate supply of labour willing to work for the current money-wage and the aggregate demand for it at that wage would be greater than the existing volume of employment.... So long as the classical postulates hold good, unemployment, which is in the above sense involuntary, cannot occur. Apparent unemployment must, therefore, be the result either of temporary loss of work of the "between jobs" type or of intermittent demand for highly specialised resources or of the effect of a trade union "closed shop" on the employment of free labour....

From the time of Say and Ricardo the classical economists have taught that supply creates its own demand;¾meaning by this in some significant, but not clearly defined, sense that the whole of the costs of production must necessarily be spent in the aggregate, directly or indirectly, on purchasing the product.... The doctrine is never stated to-day in this crude form. Nevertheless it still underlies the whole classical theory, which would collapse without it. Contemporary economists, who might hesitate to agree with Mill, do not hesitate to accept conclusions which require Mill's doctrine as their premiss. The conviction, which runs, for example, through almost all Professor Pigou's work, that money makes no real difference except frictionally and that the theory of production and employment can be worked out (like Mill's) as being based on "real" exchanges with money introduced perfunctorily in a later chapter, is the modern version of the classical tradition....

At different points in this chapter we have made the classical theory to depend in succession on the assumptions: (1)  that the real wage is equal to the marginal disutility of the existing employment; (2)  that there is no such thing as involuntary unemployment in the strict sense; (3)  that supply creates its own demand in the sense [p.22] that the aggregate demand price is equal to the aggregate supply price for all levels of output and employment. These three assumptions, however, all amount to the same thing in the sense that they all stand and fall together, any one of them logically involving the other two.


The Sticky Money Wage Keynes

From John Maynard Keynes's General Theory. One of the Keyneses. The Keynes who argues that the main thing wrong with classical economics is that it assumes that money wages are flexible and that employment is a function of the real wage and the real wage alone:

The Postulates of the Classical Economics: [W]ithin a certain range the demand of labour is for a minimum money-wage and not for a minimum real wage. The classical school have tacitly assumed that this would involve no significant change in their theory. But this is not so. For if the supply of labour is not a function of real wages as its sole variable, their argument breaks down entirely.... [U]nless the supply of labour is a function of real wages alone, their supply curve for labour will shift bodily with every movement of prices. Thus their method is tied up with their very special assumptions, and cannot be adapted to deal with the more general case.

Now ordinary experience tells us, beyond doubt, that a situation where labour stipulates (within limits) for a money-wage rather than a real wage, so far from being a mere possibility, is the normal case. Whilst workers will usually resist a reduction of money-wages, it is not their practice to withdraw their labour whenever there is a rise in the price of wage-goods.... [W]hether logical or illogical, experience shows that this is how labour in fact behaves....

[T]he contention that the unemployment which characterises a depression is due to a refusal by labour to accept a reduction of money-wages is not clearly supported by the facts. It is not very plausible to assert that unemployment in the United States in 1932 was due either to labour obstinately refusing to accept a reduction of money-wages or to its obstinately demanding a real wage beyond what the productivity of the economic machine was capable of furnishing. Wide variations are experienced in the volume of employment without any apparent change either in the minimum real demands of labour or in its productivity. Labour is not more truculent in the depression than in the boom--far from it. Nor is its physical productivity less....

If, indeed, it were true that the existing real wage is a minimum below which more labour than is now employed will not be forthcoming in any circumstances, involuntary unemployment, apart from frictional unemployment, would be non-existent. But to suppose that this is invariably the case would be absurd....

To sum up: there are two objections to the second postulate of the classical theory. The first relates to the actual behaviour of labour. A fall in real wages due to a rise in prices, with money-wages unaltered, does not, as a rule, cause the supply of available labour on offer at the current wage to fall....


New York Times Crashed-and-Burned Watch (Jim Rutenberg Edition)

Why oh why can't we have a better press corps? Jim Rutenberg of the New York Times demonstrates once again that he would be more useful to society as a cosmetics testing subject. Rutenberg regards the famous dog-eating Jew-counter Fred Malek as "noncontroversial." He may be noncontroversial to Rutenberg because Rutenberg has neither memory nor morals. Fred Malek is not controversial to me. He is very controversial to me.

Personally, my guess is that Rutenberg has a memory but has no morals.

Outsourced to Michael Froomkin.

Discourse.net: Memories Are Short: Today’s NYT has a buried article on some of the Bush administration’s latest good-bye presents for the nation: various appointments that will last long into the next administration. The article, White House Memo - On His Way Out, Bush Leads Others In, by Jim Rutenberg, claims that these appointments are mostly uncontroversial. If so, that’s only because memories are short. Consider this paragraph:

That same day, Mr. Bush appointed a longtime family friend and former business partner, Fred V. Malek, to the board of visitors of the United States Military Academy. Mr. Malek, who was a partner with Mr. Bush in the Texas Rangers baseball team, will serve for three years. A West Point graduate, he has donated generously to its campus; his appointment, like the others, provoked no complaint.

That’s amazing. We’re talking about the guy who was Nixon’s hatchet man and political manipulator and who wrote the infamous Jew-counting “Malek Memo”. But then forgetting Malek’s history appears to be a well-entrenched DC phenomenon.


Paul Krugman Nobel Prize Lecture

I am going to have to get up very early Monday morning, aren't I?

Paul Krugman - Prize Lecture: Increasing Returns: Paul Krugman, Princeton University, NJ, USA

The Prize Lecture will be held on Monday 8 December 2008 from 3:00 p.m.–3:50 p.m., at the Aula Magna, Stockholm University. The lecture will be given in English and a live video broadcast of the lecture will be available on this website. A video of the lecture will also be available here a few days later.

The Economics Prize Lecture: 8 December, 12:30 p.m. - 2:30 p.m. (CET). Watch the live webcast with Windows Media Player » Link not active until 30 minutes before start time.


New York Times Crashed-and-Burned Watch (Bill Ayres Edition)

Why oh why can't we have a better press corps?

Outsourced to Hilzoy:

The Washington Monthly: Bill Ayers: Please Go Away: For reasons best known to themselves, the NYT has published an op-ed by William Ayers:

In the recently concluded presidential race, I was unwillingly thrust upon the stage and asked to play a role in a profoundly dishonest drama.... Now that the election is over, I want to say as plainly as I can that the character invented to serve this drama wasn't me, not even close. Here are the facts:

I never killed or injured anyone. I did join the civil rights movement in the mid-1960s, and later resisted the draft and was arrested in nonviolent demonstrations. I became a full-time antiwar organizer for Students for a Democratic Society. In 1970, I co-founded the Weather Underground, an organization that was created after an accidental explosion that claimed the lives of three of our comrades in Greenwich Village. The Weather Underground went on to take responsibility for placing several small bombs in empty offices -- the ones at the Pentagon and the United States Capitol were the most notorious -- as an illegal and unpopular war consumed the nation.

The Weather Underground crossed lines of legality, of propriety and perhaps even of common sense. Our effectiveness can be -- and still is being -- debated. We did carry out symbolic acts of extreme vandalism directed at monuments to war and racism, and the attacks on property, never on people, were meant to respect human life and convey outrage and determination to end the Vietnam war. Peaceful protests had failed to stop the war. So we issued a screaming response. But it was not terrorism; we were not engaged in a campaign to kill and injure people indiscriminately, spreading fear and suffering for political ends."

Oh, for heavens' sake. The Weather Underground might have gotten its new name in 1970, but Weatherman, from which it morphed, was founded in 1969. Starting his narrative in 1970 allows Ayers to omit the time when Weatherman was not trying not to harm people: for instance, the Days of Rage:

"The Days of Rage," as the 1969 protest was called, brought several hundred members of the Weatherman -- many of them attired for battle with helmets and weapons -- to Lincoln Park. The tear-gassed marches, window smashing, and clashes with police lasted four days, during which 290 militants were arrested and 63 people were injured. Damage to windows, cars, and other property soared to hundreds of thousands of dollars. Around this time, Ayers summed up the Weatherman philosophy as "Kill all the rich people. Break up their cars and apartments. Bring the revolution home, kill your parents -- that's where it's really at."

Nor should we forget Bernardine Dohrn's comment on the Manson murders at the Flint War Council in 1969: "Dig it! First they killed those pigs and then they put a fork in their bellies. Wild!" At the same meeting, Weathermen "debated the ethics of killing white babies, so as not to bring more 'oppressors' into the world, and denounced American women bearing white babies as 'pig mothers.'" (p. 159) And they sang songs about a lawyer, Richard Elrod, who had broken his neck during the Days of Rage: "Stay Elrod stay/ Stay in your iron lung/ Play Elrod play/ Play with your toes a while." (p. 159)

The "accidental explosion" Ayers refers to occurred when three Weathermen blew themselves up while making nail bombs to detonate at a dance at Fort Dix. One was Ayers' girlfriend, "who was later identified from a fragment of finger."

After three of their own were blown up, Weatherman tried not to hurt people, though they did blow up property, and seem to have placed a lot of trust in their ability to tell, for instance, whether any janitors were still in the buildings they bombed. And after that explosion, according to Ayers, the Weather Underground got a new name. But when his co-Weathermen blew themselves up, they were planning to kill a whole lot of people. Weatherman was never nonviolent. Bill Ayers and the Weather Underground did more than 'cross lines of legality, of propriety and perhaps even of common sense.' They were, by any syandard I can think of, terrorists. As one historian says, "The only reason they were not guilty of mass murder is mere incompetence.... I don't know what sort of defense that is."

They say they did it to end the war in Vietnam. But how, exactly, that was supposed to happen is a total mystery. It's the Underpants Gnome theory of political activism:

Phase 1: Set a bunch of bombs.
Phase 2: ???
Phase 3: The war ends!

That level of tactical idiocy is one thing when you're collecting underpants. It's quite another when you're setting bombs.

Ayers may think that there's still a debate about the Weather Underground's effectiveness. And he might also think that he "acted appropriately in the context of those times." To me, though, he's just a shallow rich kid who took himself and his revolutionary rhetoric much too seriously, helped inspire people to do things that got them killed, and helped to discredit the anti-war movement and the left as a whole.

He has done enough harm already. Now he should do the decent thing and leave us in peace.


Un Beau Geste...

Debriefing leads me to an end of my search for accessible etext versions of Keynes's Tract on Monetary Reform and Essays in Persuasion. The only problem? They are en Francaise.

Brad DeLong: Things to Read by Keynes: "Essays in Persuasion" and "La réforme monétaire are available" in french on the site of Quebec University...

At least it's not in Mandarin...


Nous avons une panne de magnéto. Comment donc nous remettre en marche? Jetons un regard en arrière sur les événements:

1° Pourquoi les travailleurs et l'outillage demeurent-ils inemployés? Parce que les industriels ne comptent pas pouvoir vendre sans perte ce qu'ils pro- duiraient s'ils les employaient.

2° Pourquoi les industriels ne peuvent-ils compter vendre sans perte? Parce que les prix ont baissé plus que le coût de la production – le coût ayant très peu baissé.

3° Comment se fait-il que les prix aient baissé plus que le coût? Car le coût représente ce que l'homme d'affaires dépense pour la production de ses marchandises, et les prix indiquent ce qui lui revient quand il les vend. Il est facile de concevoir que pour une affaire en particulier, ou pour une marchandise particulière, il y ait inégalité entre les deux chiffres. Mais il semble que si l'on considère la collectivité tout entière les hommes d'affaires doivent retrouver le même argent qu'ils déboursent, puisque ce qu'ils déboursent pour la production représente le revenu du public qu'il rend aux hommes d'affaires en échange de produits que celui-ci lui fournit. C'est là, il nous semble, le cercle normal de la production, de l'échange et de la consommation.

4° Eh bien non! Malheureusement il n'en est pas ainsi, et voilà l'origine de nos maux. Il n'est pas vrai que ce que dépensent les hommes d'affaires, en tant que coût de la production, leur revienne forcément comme fruit de la vente de ce qu'ils produisent. C'est le trait caractéristique d'une vague de hausse que le produit de la vente dépasse considérablement le coût de production, c'est le trait caractéristique d'une crise que le coût de la production dépasse les produits de la vente. De plus, c'est une illusion que de s'imaginer que les hommes d'affaires peuvent forcément rétablir l'équilibre en réduisant leurs frais généraux, que ce soit en restreignant la production, ou en diminuant les salaires, car la réduction des frais, en réduisant le pouvoir d'achat de leurs employés et fournisseurs qui sont également leurs clients, réduit d'environ autant les produits de la vente.

5° Comment se peut-il donc que le coût total de la production des affaires dans le monde soit autre que le produit total de la vente ? D'où vient l'inégalité ? Je crois connaître la réponse. Mais elle est trop compliquée et a un caractère trop peu familier pour le public pour que je puisse la fournir ici d'une façon satisfaisante (j'ai tâché de le faire par ailleurs 1). Il faut donc me résigner à ne donner que quelques indications...

Keynes is sufficiently theatrical that it does sound better--to me at least--in French...


Things to Read by Keynes

Tyler Cowen writes:

Marginal Revolution: New MR book club - Keynes's General Theory: I will go through the book [Keynes's General Theory], chapter by chapter, with an eye toward a deeper understanding of what Keynes wrote and why it is, as Greg says, so important.  I'm not yet sure what kind of pace I can maintain but order your copy here, now.  The Kindle version is only $3.96.  We'll do chapters 1 and 2 by next Monday, eight days from now.

The Marxists.org version of the General Theory is free: http://www.marxists.org/reference/subject/economics/keynes/general-theory/

I am of a different view than Tyler. I think that the most important things by Keynes to read do not include the General Theory. My list of General Theory-length reading from Keynes is this:

and I am tremendously annoyed at the absence of etext versions of the Tract on Monetary Reform and Essays in Persuasion.


Special bonus:


The Punchbowl and the Designated Driver

William McChesney Martin, Federal Reserve Chair from 1952 to 1969, said that the job of the Federal Reserve Chair was to take away the punchbowl before the party really got going.

Alan Greenspan seems to have thought that the job of the Federal Reserve Chair was to spike the punchbowl with grain alcohol--but then to be ready to be the designated sober driver afterwards:

Matthew Yglesias: Alan Greenspan, Socialist: Krugman talks about Alan Greenspan:

Q: What was the problem with Greenspan, and where and when did he go wrong?

A: Greenspan is the real thing. He believes the Fed can be the designated driver, the one who takes you home safely after the party has gotten crazy. So he brushed aside any worries about regulating and taking precautionary measures. His belief in the perfection of free markets led us into the ditch we’re in now.

The interesting quirk in the fabric, though, is that it isn’t really free markets as such that Greenspan believed it. Rather, it was belief in the combination of free markets and central banking. He didn’t believe that the free market would operate uncorrected and flawlessly, he believed that the Federal Reserve’s central planning functions could be done so effectively on a post hoc basis that there was no need for any form of preventive regulation. Real market fundamentalists go in for a lot of goldbug nonsense. Fundamentally, the Greenspanist combination of massive skepticism of government intervention with overwhelming confidence in the power of the all-knowing and benevolent masters of monetary policy seems strange and unsustainable. But it is, of course, easier to sustain if you yourself are the central planner.


Defining Depression Down? Up?

Justin Lahart:

Real Time Economics: Defining Depression: Friday’s dismal November jobs report brings the old joke to mind: A recession is when your neighbor loses his job, a depression is when you lose yours. The truth is that there is no good rule of thumb for a depression, like the two quarters of consecutive GDP declines that many people use for a recession. And unlike recessions, which are semi-officially declared by the National Bureau of Economic Research’s business cycle dating committee, there’s no arbiter to say that an economy has fallen so hard it’s in a depression.

In the old days, what we now call recessions used to be called depressions. The word recession only came into common use after the Great Depression, in order to distinguish garden-variety downturns from that epic crash. Sort of like the World Meteorological Association retiring a devastating hurricane’s name. That said, with the economy in the midst of what may be its worst downturn in the postwar period, it is worth thinking about what it would take to dust off the “depression” moniker.

Richard Sylla, an economic historian at New York University, says that his rule of thumb for a depression would be double-digit unemployment rates lasting for more than a few months. The only times that occurred in the U.S. were during the Great Depression and the 1890s. The deep recession that ended in 1982 briefly saw unemployment rise above 10%. Berkeley economic historian Brad DeLong’s definition of a depression is in a similar vein: Unemployment hits 12%, or it stays above 10% for three years. Rutgers economic historian Michael Bordo says he would define a depression “as a sustained decline in output of 2 or more years of at least 10% per year. If you look at U.S. history we only really had one such event.” –Justin Lahart


A Brief Word on Economic Vocabulary...

Robert Reich asks:

Shall We Call it a Depression Now?: Today's employment report, showing that employers cut 533,000 jobs in November, 320,000 in October, and 403,000 in September -- for a total of over 1.2 million over the last three months -- begs the question of whether the meltdown we're experiencing should be called a Depression.

We are falling off a cliff. To put these numbers into some perspective, the November losses alone are the worst in 34 years. A significant percentage of Americans are now jobless or underemployed -- far higher than the official rate of 6.7 percent. Simply in order to keep up with population growth, employment needs to increase by 125,000 jobs per month.

Note also that the length of the typical workweek dropped to 33.5 hours. That's the shortest number of hours since the Department of Labor began keeping records on hours worked, back in 1964. A significant number of people are working part-time who'd rather be working full time. Coupled with those who are too discouraged even to look for work, I'd estimate that the percentage of Americans who need work right now is approaching 11 percent of the workforce. And that percent is likely to raise...

U6--unemployed, plus discouraged workers, plus part time because they cannot find full-time jobs--is now at 12.5%.

As the authority on such matters, I hereby lay down the law: No, we cannot call it a depression yet. We can only call it a depression when the headline unemployment rate--U3--kisses 12%, or when the headline unemployment rate stays above 10% for 36 consecutive months.

I hope that this has been illuminating.