Stop Me Before I Vote Again

Our fearless pwog terrier, Paul Krugman, has won the Swedish bank's pseudo-Nobel prize for "economic science." This rigorous friend of all things small-fry and Bush-battered, champion of long-gone well-hung safety nets, and well-versed anal-solonic regulators, and... and... oh Christ, blah blah blah.

Why him? Well, before he became the relentless tribune of the naked truth, the master of bright-line, gotcha! political arithmetic, over there on the op-ed pages of the Times of Laputa -- before all that, he was an innovative breakthroughish academic econ-conner; in fact, a paragon in his field. It's a field which for the last 60 years or so has required its heros and saints to boldly go where no academic mind has gone before, and formally, simply, and crisply, model some chunk of obvious everyday marketplace reality that has stared us all in the face since Columbus cheated Chief Nugawana at cards, and yet, until the publication of this particular paper, has evaded algebraic capture. Yes, trap it in Greek letters and render it in the toonish galaxy-far-far-away terms that please the rarefied minds of ivydom's Dismalians.

In Paul's case, he took an earlier breakthrough model by Dixit Stiglitz and frigged it around some, and used it, after suitable relabeling, to prove something -- well -- obvious: Toyota and General Motors might rationally choose to sell and produce in each others' home markets -- and profit maximally.

Sound impressive? No? Well, it got him overnight to the top tier of young Turks in trade theory.

But wait! There's more! Not satisfied with his initial earthshaking achievement, about a decade later, Paul built a model of optimal human civilization -- the genesis of urban habitat, those nodes of folks that pimple the market plain, swelling to the point where the economies of agglomeration just nicely balance the costs of transportation. As a lover of such toy train-set worlds, I could go on and on -- but I won't.

Street value of this body of work that won him the Swedish bankers' prize? Somewhere between the value of six mice and one large pumpkin, down at the local cab stand.

The poli-econ green-eyeshade pinkos strike back! Corporate boardrooms tremble:

"[F]rom 2000 to 2007, the income of the median working-age household fell by $2,000-an unprecedented decline. In that time, virtually all of the nation’s economic growth went to a small number of wealthy Americans. An important reason for the shift from broadly-shared prosperity to growing inequality is the erosion of workers’ ability to form unions and bargain collectively....

The problem is that the election process overseen by the National Labor Relations Board has become drawn out and acrimonious, with management campaigning fiercely to deter unionization, sometimes to the extent of violating the labor law....

To remedy this situation, the Congress is considering the Employee Free Choice Act....

As economists, we believe this is a critically important step in rebuilding our economy and strengthening our democracy by enhancing the voice of working people in the workplace. "

• Kenneth Arrow, Stanford University
• Dean Baker, Center for Economic Policy and Research
• Jagdish Bhagwati, Columbia University
• Alan S. Blinder, Princeton University
• Brad DeLong, University of California/Berkeley
• Robert H. Frank, Cornell University
• Richard Freeman, Harvard University
• James K. Galbraith, University of Texas
• Robert J. Gordon, Northwestern University
• Dani Rodrik, Harvard University
• Jeffrey D. Sachs, Columbia University
• Robert M. Solow, Massachusetts Institute of Technology
• Lester C. Thurow, Massachusetts Institute of Technology

" The institutions that govern the labor market have also failed, producing the unusual and unhealthy situation in which hourly compensation for American workers has stagnated even as their productivity soared"

The Economist, previously and charitably described as "eternally gaseous", is attempting to get real with its readership on the jobs crisis. They believe that the asset immolation was caused by excessive borrowing and the solution, in the long run, is increased labor flexibility. Labor, not content with its golden lunch pail, created this mess and will eventually have to make up for it by accepting less security. Once they all calm down. The editorial is actually less coherent than that, but I want to jump ahead to the main point: it is obvious that none of the writers have every held a job or run a business in a sector that could not count on cradle to grave state support.

Labor "flexibility" does not make job creation easier. It eliminates labor's bargaining power, which keeps the cost of labor down, for a little while. Eventually it destroys demand and then there's no need for labor at all. Once you are no longer providing a service or offering a product, you don't need a labor force. This simple lesson was accessible to a vicious, narrow minded, serial failure named Henry Ford who, after repeated destruction of his own endeavors, realized one day that workers who couldn't buy a product, wouldn't.

Inflated collateral to facilitate borrowing delays the need to pay wages, but inevitably the process reaches a breaking point. Which is where we are now. The strongest businesses in sectors that can demand a bail out are doing so. Those that can't are folding. This reduces demand, which reduces the need for a labor force that can produce the product or offer the service that once had a market. Through a mysterious transformation, understood by only 90% of humanity, the loss of livelihood affects people's ability to make payments on what was once collateral, but is now the financial equivalent of toxic waste.

It would be helpful if the slackers at The Economist could get their sticky little fingers out and try to find a job in the real world. Then, perhaps, they would understand. Work is hard, but it would help them feel better about themselves. The good feeling they could get from it is the first step on the road to shrugging off a crippling sense of entitlement and exiting the culture of dependency.

The public good, in Democratic Party philosophy, is defined by the famous "three bowls of hypothetical porridge" method. The middle bowl is defined by what's not in it, as that relates to the other two, which for the purposes of defining the middle bowl are represented as repositories of what's not in them either. In this way, a happy medium is achieved. If that doesn't make any sense and is highly irritating, don't worry. Everything is fine. You're a decent person. If it does make sense, and you can see a thesis, you're eligible for high standing in this crackpot blight on the humanities. You're also a bad person.

I mention this as an introduction to trends in risk management, and as a follow up to Owen's post on shafting the investors who are small enough to fail. Sometimes they get an additional push.

The global financial crisis should have prompted financial institutions to focus on risk management, but according to new research sponsored by SimCorp, risk management has lost status within organisations and is not being treated as seriously as it should be.

The research has been undertaken by the recently-established SimCorp StrategyLab in cooperation with The Nielsen Company and suggests that the number of risk managers actually reporting to boards has been dropping.

The research revealed that since 2007, the number of organisations that had the risk management function reporting to the board of directors had dropped by 5 per cent, from 36 per cent to 31 per cent.

The director of SimCorp StrategyLab, professor Ingo Walter, said much had been learned about the failures of risk management during the current financial crisis and it was therefore disturbing that the survey had indicated some institutions were moving in the wrong direction.

Institutions losing sight of risk management priorities -- I think that's supposed to be funny, not sure.

Why manage risk when you can not only get a bail out, but you also get to redefine risk according to metrics that are as empty as the three hypothetical bowls?

NEW YORK – General Motors Corp. has agreed to take on responsibility for future product liability claims, removing what could have been a sizable roadblock on the automaker's path to a quick sale of its assets and emergence from Chapter 11 bankruptcy as a new company.

As part of its government-backed restructuring plan, GM wants to sell the bulk of its assets to a new company and leave behind unprofitable assets and other liabilities such as product-related lawsuits. A hearing on the proposed sale is scheduled for Tuesday.

The previous business model was the best effort of well-meaning managers, but somehow or other the dead weight of "unprofitable assets and other liabilities" grew and grew until, sadly, poor GM went bankrupt. Unprofitable assets and other liabilities occur without agency, needless to say. They just happen! All we can do is bob along on the tides that generate them. And anyway, the golden lunch pail crowd and the sinister Asians made them do the things that occurred without agency.

GM's founder, Abner Snopes, was a humble man who didn't take shit from no one. He worked hard, but couldn't get a break. Beset from all sides, he did what any man might do in his circumstances and handed the torch, er, managerial ethos on to his successors.

They did their best too, as their legacy demanded, and I think we can all agree that recriminations are unhelpful, with the exception of recriminations for the golden lunch pail crowd and any other undeserving wretches that need a sharp lesson in economic realities.

Shorter Samuel Brittan.

The findings are in: for actually existing economists, a knowledge of the economy is impractical, and irrelevant to their careers.

To my way of thinking, this makes them perfect for guiding, overseeing and opining on actually existing capitalism.

I haven't kicked Bubbles Delong around recently. It's time. Here's the Prof:

"I am -- in normal times -- a deficit hawk. I think the right target for the deficit in normal times is zero, with the added provision that when there are foreseeable future increases in spending shares of GDP we should run a surplus to pay for those foreseeable increases in an actuarially-sound manner. "

(There's some variant on Leda and the swan that we might elaborate here -- but let's not.)

More Bradford:

"I think this because I know that there will come abnormal times when spending increases are appropriate. And I think that the combination of (a) actuarially-sound provision for future increases in spending shares and (b) nominal balance for the operating budget in normal times will create the headroom for (c) deficit spending in emergencies when it is advisable while (d) maintaining a non-explosive path for the debt as a whole."

Oh, I know. I mutter, I mime, I sputter, I spit. But the weight of this tinkling brass self-displaying claptrap in a time of mass misery weighs on my broken housecat of a chest like the oaken catafalque of a frost giant.

A little while back, Owen asked me to do an exposition of Wynne Godley's economic model. Here's a start at least. I'm going to begin with the basics of macro, like GDP, and then move into a simplified sectoral balances approach used to analyze the factors that influence GDP. It's pretty "wonkish", but if you can get through this, then you'll be dismalizing with the big dogs in no time. If anyone has any questions, I'd be happy to answer them.

Gross Domestic Product (GDP) is the value of all goods and services sold within a country during one year. GDP measures a flow rather than a stock (example: the federal deficit is a flow, the federal debt is a stock).

In the above diagram, Nominal GDP would be measured as the flow of money that passes through the "Domestic Producers" in one year, while Real GDP would measure the volume of goods and services produced by the "Domestic Producers" in exchange for that money.

If RGDP increases, then you have growth. If RGDP decreases, then you are in a recession.

If NGDP increases faster than RGDP, then this contributes an increase to the price level (average per unit price of domestically produced and imported goods & services). If the overall change in the price level is positive, then you have inflation.

If NGDP decreases faster than RGDP, then this contributes a decrease to the price level (average per unit price of domestically produced and imported goods & services). If the overall change in the price level is negative, then you have deflation.

The blue arrows (Savings, Taxes and Imports) denote money being taken out of the national economy. The green arrows (Investment, Government Spending and Exports) put money back into the national economy. If the total outflows are more than the total inflows, then NGDP decreases. If total outflows are less than total inflows, then NGDP increases.

(Inflows) - (Outflows) = Change in NGDP
(I + G + X) - (S + T + M) = ΔNGDP

The sectoral balances approach, pioneered by Wynne Godley and now in use at Goldman Sachs and PIMCO, provides a useful way for thinking about the imbalances that may occur. It groups the inflows and outflows according to sector. If any sector takes more money out of the economy than it puts back in (saving), and is not compensated for by the other sectors putting more money in than they take out (dissaving), then the overall flow of money to the Domestic Producers, NGDP, decreases (Paradox of Thrift). For any given period, ex ante, it would look like this:

(I-S) + (G-T) + (X-M) = ΔNGDP

I = Investment
S= Savings
G= Government Spending
T= Taxes
X= Exports
M= Imports
ΔNGDP= Change in Nominal GDP.

The brackets are used to denote the separate sectors.
Private sector (business sector & household sector) dissaving= (I-S)
Public sector dissaving= (G-T)
Foreign sector dissaving= (X-M)

This chart from Goldman Sachs shows the savings rate for each of these three sectors over the last few decades. Whenever a sector stays above 0, it is saving (lending to others). Whenever a sector is below 0 it is dissaving (borrowing from others) . Note that since savings equal debts at the aggregate level, all three rates sum to 0, ex post.

Clinton Era (1992-2000): The trade deficit results in the foreign sector saving. The government also saves by reducing its deficit and eventually establishing a fiscal surplus. The private sector picks up the slack by increasing its borrowing, encouraged by Greenspan's low interest rates. Trend: private dissaving, public saving, foreign saving

Bush Era (2000-2008): The trade deficit is still widening, and the foreign sector is saving even more (Bernanke's "savings glut"). The drag from the trade deficit is so bad that Bush's large fiscal deficits and Greenspan's low interest rates are necessary to keep the economy afloat. Trend: private dissaving, public dissaving, foreign saving

Obama Era (2008-2010): The trade deficit is still an issue, but now the private savings rate has gone up while private borrowing has collapsed. The private sector can't be convinced to increase its borrowing, even with interest rates at 0%. Now the public sector has to pick up the slack for two sectors, necessitating huge deficits. Trend: private saving, public dissaving, foreign saving.

That's it for now. For further reading, you can check out this article.

*NOTE*
Causation: This model itself doesn't say anything about causation (why one sector is saving or dissaving). It leaves that question open. I've hinted at the way that I see the causation running in my summary of the Clinton-Bush-Obama timeline, but the model itself leaves those questions open to further inquiry.

Wynne Godley's concept of Stock-Flow Consistency is fairly simple: in a closed system like the global economy, all flows must come from somewhere and end up somewhere. An increase in one stock must be consistent with the net flow into it, and also decreases in other stocks.

Since everybody loves an animation:

This concept can be applied to our earlier sectoral balances equation:

(I-S) + (G-T) + (X-M) = ΔNGDP

You can visualize each of these sectoral flows having a corresponding stock:

(I-S) = -ΔPrivate Stock
(G-T) = -ΔGovernment Stock
(X-M) = -ΔForeign Stock

When a sector saves, it builds up its assets and/or decreases its liabilities. When it dissaves, it reduces its assets and and/or increases its liabilities. This yields a change in the sector's stock, the net position of its Balance Sheet (Assets vs. Liabilities).

As you can probably imagine, keeping track of these stocks and flows between more than two sectors is a bit of a difficult task. In order to summarize the state of a large system, and the interdependency of the various sectors, Godley uses matrices. Shown below is a simple matrix that, for simplicity's sake, only considers financial assets and liabilities to simply be money borrowed or lent in the form of bonds:

Say the government spends $50 billion, and takes in $100 billion in taxes:

(G-T) = -ΔGovernment Stock
($50B - $100B) = -ΔGovernment Stock
-$50B = -ΔGovernment Stock
$50B = ΔGovernment Stock

The government's stock would increase by $50 billion. If the government is already in a net debtor position, the net debt would decrease by $50 billion. In order to satisfy Stock-Flow Consistency, the other sectors would have to borrow $50 billion from the government, or the government would have to build up its cash holdings and other sectors decrease their cash holdings (not included in the above matrix). These cash holdings, or money stocks, act as a buffer within the system, allowing the economy to run smoothly.

What happens when one sector can't find another sector to lend to, or to borrow from? The amount that is not recycled through inter-sectoral lending or borrowing is instead added to a sector's buffer stock of money, or effectively destroyed by paying down a debt to a commercial bank, or created by taking a new loan out from a commercial bank, showing up in a change in NGDP.

This is about as far as we can go with this simple model. In the next post I'm going to start disaggregating the private sector and introducing a banking system that actually creates dollars. I realize that this post is a bit dry, but I just wanted to introduce some of the basic methods and concepts used in Godley's analysis before delving into the more interesting stuff.

I recently came across one of Keynes' essays that I had never seen before, "Economic Possibilities for our Grandchildren". It was heartening to read, given that I share a certain sense of optimism with him -- the sense that we are on the cusp of solving the economic problem, that our chief problem will soon be an excess of otium, and that our current crisis is more likely to give way to an era of progress rather than one of stagnation. These things are as true today as they were when Keynes was writing 80 years ago. He thought that this sort of economic utopia could be achieved by 2030, but I would add another 50 years to that, given the four decade detour that we have been on.

One part that I particularly enjoyed was his speculation regarding the fate that awaits saving, once it is no longer of any use to society. Oh to be rid of these grasping Goriots, these heinous Harpagons! I can hardly wait!

When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues. We shall be able to afford to dare to assess the money-motive at its true value. The love of money as a possession -as distinguished from the love of money as a means to the enjoyments and realities of life -will be recognized for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease. All kinds of social customs and economic practices, affecting the distribution of wealth and of economic rewards and penalties, which we now maintain at all costs, however distasteful and unjust they may be in themselves, because they are tremendously useful in promoting the accumulation of capital, we shall then be free, at last, to discard.

Of course there will still be many people with intense, unsatisfied purposiveness who will blindly pursue wealth-unless they can find some plausible substitute. But the rest of us will no longer be under any obligation to applaud and encourage them. For we shall inquire more curiously than is safe to-day into the true character of this “purposiveness” with which in varying degrees Nature has endowed almost all of us. For purposiveness means that we are more concerned with the remote future results of our actions than with their own quality or their immediate effects on our own environment. The “purposive” man is always trying to secure a spurious and delusive immortality for his acts by pushing his interest in them forward into time. He does not love his cat, but his cat’s kittens; nor, in truth, the kittens, but only the kittens’ kittens, and so on forward forever to the end of cat-dom. For him jam is not jam unless it is a case of jam to-morrow and never jam to-day. Thus by pushing his jam always forward into the future, he strives to secure for his act of boiling it an immortality."

With any luck, our New New Soviet Man will look down on Warren Buffett (a truly demented specimen) with the same mix of pity and revulsion aroused by the sight of a hoarder slowly entombing himself in bric-a-brac.

When is industrial policy not industrial policy? Why, when you're big enough to call it something else. For developing nations, it requires no euphemism. In fact, the poor things are subject to the full grope and backscatter regimen prescribed for hapless travelers in the Land of the Free. For the G3, however, we get decorous euphemism through central bank-speak.

I do get a kick out of the fan dances that go on in the effort to conceal the fact that winners and losers are necessarily going to be picked. There's no other way to have large scale industrialization. It can either be shitkicking stupid, bugfuck nuts supply side, "la la la I can't hear you" military Keynesian selection, as we have in the full blown neoliberal dispensation, or an activist dirigisme that proudly struts its stuff.

That settled, we can get to the real question: should USian economists be required to adopt stripper names? I think yes, starting with Larry Summers, who looks like a Bonbon du Jour to me. I know that Bonbon, in his heart, would prefer an activist pro-labor dirigisme. Here's a little something to get him shakin' it.

President Obama's chief economic advisor, Laurence Summers, offered the following assessment, "It may be desirable to have a given amount of work shared among more people," he conceded. "But that's not as desirable as expanding the total amount of work." Why is expanding the total amount of work more desirable? From a Treasury perspective, more work increases tax revenues while sharing work could potentially decrease revenues. This treasury view also brings into focus a prime objective of supply-side economics – its magic was supposed to flow from incentives that encourage people to work more hours (or that penalized people for working less).

Excerpted from Tom Walker's The Prosperity Paradox.

Then again, maybe he's not so enthusiastic. Digressing, that could be called the Mother Of All Nudges, making Cass Sunstein look like the miserable piker he is.

Digressing further, why the literal grope and backscatter regimen, and why now? My guess is there's no better neoliberal way to harass and distract people whose social circumstances require air travel. It makes class lines abundantly clear, from the resentful groping class, to the resentful groped class all the way up to the guffawing grope-free class, which loves its Stakhanovite hours. And why not indeed. There's nothing like pushing people around as a means of measuring power and wealth.

Krugman on the Mother Of All Sales taxes.

I think this gets to the heart of the liberal weakness. They decouple everything into a goo that passes for rational, and passes for that only because right wingers reliably provoke deranged revanchism. The correlation between VAT and big social welfare programs requires a narrow, squinting gaze. The big welfare states tax a lot more than sales. Moreover, in recent history the great fortunes of the social democratic welfare states offered less protection against a jacquerie than they do here.

The Sandwichman provided the philistines at Brookings with a scholarly paper perfectly suited to their needs and views. He gave them a glistening Lump they could clutch to their mean little hearts. And what did they do? I suppose it goes without saying, but they sent him a rejection letter.

I thought the argument he made was compelling. An increase in working hours, raising the retirement age and providing small children with the opportunity to enter the job force should increase prosperity. We all know that the Lump of Labor is fallacious. It stands to reason, then, that policy should take this into account, good and hard. But the Hamilton Project eminences said they didn't like it. I can't for the life of me understand why and, frankly, I don't believe they actually reject the argument. My guess is they plan to steal his ideas and slip them in through libertarian paternalist, passive aggressive "nudges".

Just a bit of digital scribbling on intellectual allergies.

There's something butlerish about mainstream economists. They believe in a way their masters do not. When they rail against something, for example the Lump of Labor, they do it sincerely. But no one else has ever seriously entertained the thought that there is a completely fixed amount of work to be done. It's a laughable idea. More often than not, work creates more work, much of which detracts from quality of life. The merest brush with manual labor is enough to prove the truth of that.

This being the case, why on earth do they spend so much time attacking it? The simplest answer is: projection. Bootlickers, cretins, sneaks, snitches, managerial Stakhanovites, etc. constantly find their own flaws, magnified, in everyone they intend to harm.

That's harsh and overstates the situation in most cases (although...). The "good education" they receive has a whacking dose of operant conditioning. When they're out of the brain grinder, they're faced with the reality of their sunk costs and the need to make a living. The easiest thing is to find a niche within the status quo. A shared allergy is very helpful with that. When everyone is sneezing, force of numbers reassures them that the allergen actually exists.

When I was a young lefty, the ideal form of public debt, sometimes called national debt, was explained to me as labor contributed, today, in excess of immediate compensation, with deferred compensation down the line. In other words, it's not a threatening obligation. It's an investment. That's a simplification, but it makes a lot more sense than deficit terrorists' death-dealing Debt Bomb of Doom scenarios and the lazy Micawberisms of the sensible liberals.

I'm late to the party but Happy Anniversary nevertheless. Ecological Headstand is one year and five days old.

The footnote: the "structural unemployment" excuse, beloved of neoliberal policy wonks, is based entirely on the belief that there is a fixed amount of work to be done. This is the Lump of Labor Fallacy. "As the derisive name suggests, it's an idea economists view with contempt, yet the fallacy makes a comeback whenever the economy is sluggish."-- Paul Krugman, regular reader of Ecological Headstand.