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Archive for January, 2010

New Feature: Friday Links

I’ve decided that I’m going to make Friday links a regular feature on this blog. Why? Mainly, the Twitter thing clearly hasn’t caught on with this blog’s readership, so I want some way to communicate links that are worthy of reading but don’t stimulate a post. Look for it here, every (gulp) Friday afternoon. I’ll have two categories, serious links and diversions (it is Friday). Also, if you have a link to recommend, throw it in the comments, please (and to everyone else, check the comments for others). Have a great weekend!

Serious links

Aid Watch: Indigenous slavery has lasting effects on development (the human kind)

Breakdown Podcast: Chris Hayes discusses the non-discretionary defense spending  freeze.

David Ruccio: Discussing class as a social process

IPS: World Social Forum at 10

The Baseline Scenario: Simon Johnson skewers Congress on Bernanke reconfirmation

Real Time Economics: Economists react to the Q4 GDP report

Marginal Revolution: Alex Tabarrok asks, do animals have animal spirits?

Diversions

Bill Simmons: What are the most tortured fan bases in (American) sports?

Incredible sand animation video (the time will fly, trust me).

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Catherine Rampell (h/t Thoma) writes about the depressingly permanent effects of the current recession:

The big ocean of blue represents the portion of the unemployed who have lost their jobs, with the lighter blue section showing those whose jobs are gone permanently.

There are multiple ways to explain why permanent job-losers represent a higher share of the unemployed this time around. Maybe, as others have suggested, many of the jobs gained in the boom years were built on phantom wealth. Or maybe the culprit is a corollary of Moore’s Law, the idea of exponential advances in technology over time. That might suggest that innovation and automation displace more and more workers by the time each recession rolls around.

Whatever the underlying cause, the result is concerning: Compared to previous recessions, many more of the employment gains in this recovery will have to come from new jobs.

That is much easier said than done.

Workers whose entire occupations — not just the previous payroll positions they held — are disappearing (think: auto workers) will need to start over and find a new career path. But the new skills they will need take a long time to acquire.

That’s assuming, of course, that the job market does grow in other occupations, rather than simply stagnating. When we have to revise our NAIRU up to 7 or 8%, will we finally realize that this is no way to structure an economy?

All of which is to say that many of the Americans who are already out of work are likely to stay in that miserable state for a long, long time. And the longer they stay unemployed, the harder it will be for them to transition back into the work force, further fueling America’s growing underclass.

The administration is likely to have a big labor (and class) problem on its hands, and one that won’t be solved merely by an increase in the gross domestic product.

Depressing stuff.

Updated (1/29, 3:20 PM): New visitors, check out the top posts on the right side, or click on some of our Friday Links.

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RIP Howard Zinn

Tireless historian and activist Howard Zinn has died this evening, at the age of 87. He leaves behind a legacy of enhanced social and historical consciousness. I’ve only read A People’s History, an excellent alternative history that will prevent you from viewing our country the same. Zinn has also left behind the Zinn Education Project, which will allow teachers present and future to further his legacy. This is a sad day, but he has ensured that his work will outlast him.

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Realizing that it is somewhat unadventurous to merely review and regurgitate other reviews of quality work, I decided to purchase, read, and review David A. Westbrook’s Out of Crisis: Rethinking Financial Markets. In that spirit, I also urge you to read the book for yourself and draw your own conclusions. This, I believe, is an important book for our times. Here are my (somewhat long) thoughts:

In one sense, this book is very modest in its aims. In the introduction, Westbrook admits that, “it is sociologically and psychologically implausible that our administrative agencies will rethink our financial markets at all well and except under extraordinary circumstances.” However, as the title implies, in order to get out of the crisis, we must move ourselves from the limited framework of thought that has dominated policy for decades. And, of course, we are in extraordinary circumstances. Even so, introducing a new paradigm of thought, even while acknowledging that it may fall on deaf or corrupted ears, is an ambitious undertaking.

Against the current backdrop, Westbrook’s rethinking seems quite necessary. Indeed, he argues that the crisis represents the birth pains of a transition to a new era of financial capitalism (replacing the era of portfolio management, which spanned three decades). Entering this era with anything less than a new framework of thought will leave policymakers two or three steps behind. As Westbrook argues, even our grammar and language for markets needs to be reshaped.

So, what are the assumptions with which we move forward in this bold rethinking? First, Westbrook seeks to dispel the somewhat irrelevant bifurcation between governments and markets. This key move is related to another predisposition, the idea the financial markets are intensely social entities. Third, related to this, Westbrook want us to understand finance from a legal perspective as a series of contracts, rather than a set of property rights. Finally, Westbrook seeks to reemphasize the importance of uncertainty (sharply distinguished from risk) in how our financial markets operate.

Early on, he dispels with what he terms “melodramatic narratives” of the crisis, ranging from securitization to monetary policy, all of which are intellectually conservative because they operate within the same structure of thought that led to the crisis. Not among their number is the exploitation-inequality-uneven demand explanation that is common in Marxian and institutionalist circles, and that I’ve trumpeted on this blog on many occasions. In many ways, Westbrook’s argument is tangential to this narrative, as he is primarily probing the financial crisis, which is one (albeit major) part of the economic crisis. As a law professor, it doesn’t seem to strike him as to whether his narrative of the broken framework is sufficient for a broad economic crisis; however, this wrinkle doesn’t make his argument any less relevant.

The path that the financial sector has taken in recent decades is broadly indicative of an attempt to move from uncertainty to risk, inserting knowledge as the previously missing link. As Westbrook argues, however, the contractual nature of financial instruments weakens the ability to execute knowledge in a way that constructs the more simple risk. The failure to see this disconnect has led to the false allure of diversification, in which risk is managed by spreading resources over a number of purportedly independent investments. Again, going back to contracts, Westbrook argues that diversification, or “portfolio management,” necessarily reduces transparency. This story echoes the mainstream account of subprime-based CDOs, but builds on it by arguing that a whole range of securities and derivatives can fall prey, and the underlying causes run deeper than a shock to housing prices or the like.

So where has the government been in all of this? Westbrook argues that the zero-sum conception of the government-market relationship has “legitimated” bureaucratic irresponsibility. He faults the free-market ideologues for insisting that market priorities supersede societal goals or human ramifications. However, he also cautions that much is unknowable for regulators, who thus should seek performance over design, so as to stay ahead of the curve. Markets must be approached as they are: existing in a social space.

It is at this point that Westbrook makes one of his most important contributions, urging a reshaping of our metaphors and grammar for markets, so that they don’t replicate the false dichotomy between government and markets. His most useful metaphor, I think, is “tensegrity”: a structure in which elements pull against each other, but the structure remains as long as the link are tight- the structure is “integrated by tension.” The tension, in this metaphor, is credit, underscoring the notion that credit is the lifeblood of the modern financial system. He also uses ecology as a metaphor, and says that we should think about markets not as a jungle but as a garden, a place “of both planning and necessity.”

Where does these intellectual move lead us? First of all, we shift our focus to systemic risk, as Westbrook argues, acknowledging that diversification is pretty much meaningless for our situation. His hope is that systemic risk “become a concept…that broadly organizes thought.” There will always be structural weaknesses in a regulatory regime; however, basically misguided policy puts us in a far more precarious position. Confronting uncertainty as a certain reality is a difficult-financially and politically-but necessary consequence of acknowledging systemic risk. Thus, while systemic risk appears to be moving to the forefront in intellectual discussions- I say this mainly on the basis of VoxEU articles in the last year- the discourse is not occurring in the radical (i.e. to the roots) way that Westbrook encourages.

We also must carefully consider the risk of constructing what Westbrook calls a “courtier economy,” in which the powerful use their money and influence to capture the (de)regulatory process. He sees the construction of this class as one of the first steps toward a protectionist and militarized world, as a courtier class inevitably will push national policies that engender international tension.

At first glance, Westbrook’s argument seems to push for a “balanced” approach to the economy in which more socially-embedded markets gain more influence. However, there is no blueprint for what a socially-embedded market looks like. We certainly know what it doesn’t look like; a Polanyian view of the last few decades easily exposes the failures of the market-utopian drive. However, there are no assurances that the markets of the future will actually be regulated as if they are socially constituted. Are we to trust that this rethinking will help us get things right next time, or that reconceived markets are even the right way forward?

Should it be the case that they are, I hope they are conceived from Westbrook’s framework: that class tensions, uncertainty, and complexity are confronted head-on; that bureaucrats acknowledge their role and consider systemic issues in their designs; that we have more garden and less jungle. In an e-mail, Westbrook points out that he hopes this book serves as a political intervention in our society. The measure of its success as such will inevitably be whether we begin to hear the words “social” and “markets” in the same sentence from regulators, and whether we observe a change in our metaphors and an acknowledgement of contradictions. Understanding this book requires that we make the leap in accepting the constitutive role that discourse has. This pill is easier to swallow for intellectuals than for the quants and paper-pushers, whose language has been handed to them, their jargon ingrained. Westbrook is aware of these difficulties, yet one cannot blame him for seeking something of a revolution in thought.

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It’s odd (but perhaps not unexpected) that I haven’t written much about Africa since it became my primary job focus. I found this piece by Jason Hickel in MRZine interesting as a follow-up to this poverty and human rights post from last June. In that post, I discussed Bill Easterly’s concerns with using human rights as an entry point for humanitarian aid. I concluded,

I have a hard time disagreeing with [Easterly] on these points. A human rights framework certainly provides ample motivation for fighting poverty, but it is lacking in the “how” area.

I think he misses one key point, though: social rights can inform approaches that emphasize the importance of subsidiarity in aid programs- having decisions made at the most local level possible. Of course, this effort must be combined with political and civil rights that build the capacity so that this type of process can actually happen.

Perhaps we can do better than rights, though. Hickel’s piece discusses South Africa’s transition from apartheid to democracy and the failings of the rights-based approach.

the state conveniently sidelines substantive questions of class…The reformers insist that the failures we sense are due merely to problems of implementation, that “rights” are the solution to social inequality.  South Africa has the most progressive constitution in the world, they remind us: it’s just a matter of realizing the rights that all citizens have been assigned.  If we can manage to beef up bureaucracy and expand service delivery, all will be well; the revolution lies therein.

The rights-based approach, as Hickel argues, reinforces state-based power structures with harmful class divides:

The state can grant people discursively constituted rights with one hand and strip them of the conditions for sustainable life with the other, without ever having to confront the contradiction.

In this sense, “rights” are a safe reformist option for a capitalist state with a progressive image to maintain.

Further, the rights that matter in the context of poverty alleviation are treated ambivalently:

socio-economic rights, however — such as rights to water, food, and housing — are only “progressively realizable,” according to the Constitution, and limited by the resources that the state has at its disposal…

When it comes to things like water and jobs, we need a fundamental paradigm shift, a transition from the notion of “rights” to the concept of “commons.”

South Africa has some basis for moving to this sort of concept. I’m not sure if it’s unique in that regard.

Hints of this hide in the Freedom Charter.  About natural resources it states, in paraphrase: “the national wealth of the country shall be restored to the people, and industry and trade shall be controlled to assist their wellbeing.”  Such words do not rely on the discourse of individual rights.  Nor do they hail the specter of command communism.  Instead, they assert the simple point that none has the right to possess and accumulate that which society holds in common.  Upholding this basic principle would not mean the abolition of private property or industry, but merely that certain public goods must be understood as commons, and that protections, profits, and benefits should accrue to people accordingly.

Conceptualizing socio-economic needs as drawing from a commons leads us to a radically different societal structure. As my former professor, David Ruccio, would often point out, we’ve made a choice as a society to not have explicit markets for things like human organs. Perhaps decommodifying water would also be reasonable. The knee-jerk neoclassical reaction to this idea is that water would then be inadequately provided. However, as many activists around the world has shown, water privatization has failed miserably.

And what about food? I can see the value of a market-based system because of the complexity that food production necessarily entails. However, the commodification of food has made it vulnerable to a host of “exogenous” shocks; many point to US biofeul legislation as the cause of the 2008 food price spike. In years past, OECD agro-subsidies have made it impossible for farmers in developing countries to produce food and expect a reliable return for their effort. I recently read the book Enough, which points out that the host of issues surrounding globally commodified food are the primary reason that Norman Borlaug’s Green Revolution hasn’t spread to Africa. Our society seems to be moving the wrong direction. Developed countries are seeking to commodify carbon as well, perhaps a dangerous prospect for technological progress in that area.

Developing countries, for their part, are mostly at the whim of the global economy on these issues. South Africa, because of its size, may be able to address these problems and move to a commons-based approach to basic necessities. Uganda, however, would likely lose conditional aid if it rolled back privatization. Many developing countries simply lack the resources to mobilize desires that their civil societies might have for restructuring their economies. In any case, rights don’t seem to be getting us very far, so at the intellectual level, I’d think we should begin to use the commons as our theoretical basis.

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I apologize for this post coming five days after it was promised in my post on the first review – other events intervened. I have two other reviews to cover on David A. Westbrook’s Out of Crisis: Rethinking Our Financial Markets. The first is by Lyman Johnson, a law professor at Washington & Lee University and University of St. Thomas. Johnson focuses on Westbrook’s suggestion that,

we break out of the conventional analytical dichotomy between emphasizing one or the other of “the (free) market” and “the (regulating) government.”  Rather, markets themselves are one mode of shared governance and they should be deliberately and democratically constructed to achieve certain societal goals and avoid certain perils.

According to Johnson, Westbrook’s book seeks to challenge mainstream accounts of the financial crisis.

what Bert calls the standard narratives [evade] a more fundamental examination of root causes, one not easily reducible to a clean storyline or obvious policy prescription.  Bert sees the crisis as an occasion of such colossal failure that it demands a bold rethinking of how we conceive finance, regulatory policy and modern capitalism itself…

The book, early on, states that it seeks to revive and extend a “social understanding of markets” running back to Veblen, Weber, Durkheim and other social theorists though, in fact, Bert later seems to equate “social” with “political,” a point to which I will return.  He also early on makes the critical, often lost, distinction between “uncertainty” and “risk,” and he clearly states why he is extremely skeptical of self-regulation grounded on claims of market efficiency and human rationality.

Johnson sees the book as an entry point into a broader discussion:

Bert’s wonderful book would be even better had he not emphasized only the government as a “social” actor.  Our social terrain – and so our thinking about markets – can be more intentionally and beneficially shaped by other civic institutions…Broadening the conversation Bert seeks will give more of us a voice in how to shape markets as well as heighten our own sense of responsibility…To democratize capitalism requires, to be sure, renewed thinking about government’s role in finance but it also demands fresh thinking about finance in many other venues.

Now onto the final review (I’ll comment on both at the end), by Larry Cunningham, Professor of Law at George Washington University. Cunningham sees the book as one that avoids ideological tugs-of-war between markets and regulation. This insight, according to Cunningham, is enabled by a broad methodology:

They are also insightful, offering perspectives not only from law and finance but from political science, sociology and philosophy…, it enables the book to develop and defend its broader thesis, a trait that distinguishes this book from most others attempting to explain the crisis and prescribe corrections.

What’s especially distinctive about Westbrook’s account is how it offers to locate both diagnoses and prescriptions arising from prevailing calamities in a broader framework of social and political organization and institutional design. It shows how inadequate attention to this larger conception misleads debate, both before and since the crisis, into false dichotomies…

The false dichotomies arise because of preconceptions about distinctions between government and markets. Those can obscure the deeper reality that both are products of social organization…

It conceives the relation between regulation and markets differently than prevailing talk. Markets do not arise or arrive bearing inevitable or immutable traits, rules or roles…

People must appreciate that markets are social and political products and that participants in effect choose what design features particular markets should offer. The book at this stage announces its modesty and does not labor over exactly what corrections or changes should be made or how…

There seems to be a consensus (at least among The Conglomerate‘s guest reviewers) regarding Westbrook’s broad (some might say eclectic) approach, as well as his efforts to show that the market and society are linked and that markets are not homogeneous entities. These aspects are extremely important, and I’d like to offer my own take on them after I read the book (which I will hopefully complete this weekend).

In an e-mail, Westbrook also emphasizes his desire that the book serve as a “political intervention.” Based on the reviews, Westbrook seems to offer more of a structural framework than a set of prescriptions. As a political intervention, this framework will prove invaluable.  Indeed, yesterday was a seemingly important day for regulation, as Obama proposed measures on the banks widely described as “populist.” However, a number of commentaries argue that the new regulations miss the point.

Probably more important was the SCOTUS decision, which could dramatically alter the way the corporations hold government policies captive. In a sense, this sort of direct advertising could enable banks, insurers, et al. to create markets of their own design. Rethinking the role of the government in markets is going to become a more pressing matter in years to come

Given these concerns, it is especially important that we begin with the correct premises on regulatory reform. Next week, I’ll offer my own take on how Westbrook’s book and how successful he is in challenging our current framework of thought and pointing toward a new one. I’d especially like to get a sense of the discursive elements of such a framework, although I fear I may be wading into the deep end…

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Mark Thoma sums up today’s SCOTUS decision well:

Just what we need, an increase in the ability of corporations to exert political influence…

If a legislator votes for health care reform, to limit greenhouse gases, to impose tough regulations on banks, etc., there is nothing to stop corporations from using their billions in profits to target that individual with a blitzkrieg of negative ads. Legislators from small districts cannot match the resources that corporations have at their disposal, and even legislators from large districts would be quite vulnerable. As Andrew Leonard notes: [...]

…now the Supreme Court has handed Wall Street a huge club with which to thwack Obama or any other politician who dares to try to restrain the likes of JPMorgan and Goldman-Sachs. And you can bet they won’t be shy to use it.

If we going to allow corporations to participate in this way, we also need accountability. It’s bad enough to have a tilted playing field in favor of corporations when they are playing fair, but when they are allowed to make false charges against candidates or about issues and not be held accountable, that’s a big problem.

Chris Hayes sums up the political ramifications via Twitter:

I propose a bet: $500 to Partners in Health to any libertarian takers. Tot. corporate IE’s in 2010 cycle for R’s will exceed those for D’s.

And, of course, there’s the  issue that policies favored by Democrats will become even more watered down by corporations. Not a good day for the democratic process…

Update: I enjoy Ezra’s headline about this decision: “Goldman/Exxon 2012″

He also point to a tweet by Brian Beutler:  “appearance of influence or access will not cause the electorate to lose faith in this democracy,” says SCOTUS…b4 bursting into laughter.

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For those of you who use Twitter, I’ve decided to finally start using it for this blog (I’ve been using it personally for months, but have been lazy). Anyways, I will update it regularly with tinyurls for every post made here as well as occasional links or retweets that warrant mention but for whatever reason will not get posted here. I’m not really sure what role this media will have for this blog, but I might as well try…

Anyways, you can follow @openeconomics using the link.

Also, for those of you who don’t use Twitter but don’t want to miss out on the fun, the twitter widget on the right hand side will have the 5 most recent tweets, so you won’t miss any articles I post there.

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The Illusion of Conversation

The sum of conversations, email exchanges, meetings, and everything else that has been recounted to me leaves me with one conclusion: Dean McGreevy does not truly value an “economics conversation.” This conclusion comes in spite of the fact that both publicly and privately, McGreevy’s line for several months has been to express his desire to “move the economics conversation forward on all fronts.” Of course, for a while this opinion was simply that of a disgruntled and somewhat radical alumnus. Now, via David Ruccio, I see that a retiring member of ECOP has made a similar charge against McGreevy in The Observer:

for the last few years of my career I have engaged in futile efforts to maintain contacts with colleagues in ECOE. I would have very much liked to take advantage of the many speakers they have brought in; but despite appeals to a coordinator of their speakers series, to Dean Roche and Dean McGreevy and to ECOE chairperson Richard Jensen, I have been unable to access sufficient information on their seminars and workshops…

I have pursued the issue repeatedly with Dean McGreevy, once heatedly in a reaction to a boast in The Observer last fall that “we are trying to create the best economic conversation we can have at Notre Dame.” Although he has not been forthcoming in explaining what is going on, he has apparently taken the stand that he cannot or will not do anything about it — other than dissolve ECOP. That members of ECOP, several of whom have taught economics in the College of Arts and Letters for over 40 years, cannot get information on upcoming seminars and workshops — in economics, in the College of Arts and Letters — strikes me as an egregious repudiation of academic civility and does not bode well for my colleagues who carry on.

Add this to the laundry list of evidence that the plan was never to have two departments with any sort of conversation. The plan, which originated way back in 1997, and whose execution started with the split in 2003, was to divide the department, marginalize the heterodox folks, continue to assail their credibility, and then remove them from the department entirely. The economics conversation going forward will be a very limited one if the Dean’s recommendation comes to pass. He certainly is aware of this, but doesn’t care- as I pointed out in my open letter to him, most students will not notice the difference. All the better if he doesn’t hold any public forum before submitting his recommendation- why allow doubt to be raised over a foregone conclusion? This whole process has been nothing but a sham; barring an unforeseen sea change, expect the academic council to carry out the long-prescribed marching orders, which will undoubtedly raise the department’s profile among it’s self-professed peer institutions. Isn’t that the purpose of academia?

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ECOP Still Set to Be Dissolved

The front page of today’s Observer reaffirms Dean McGreevy’s decision to close ECOP (which, for the record, is not a mere “branch” of the economics department). The university’s academic council will discuss his recommendation on February 25th. First, the nuts and bolts:

The Department of Economics and Policy Studies will likely be dissolved by the beginning of the 2010-11 academic year…

The remaining economics department, the Department of Economics and Econometrics, will be renamed the Department of Economics…Some faculty members from Economics and Policy Studies will join the new department, but the new department will not be a combination of the two existing departments…

Other Economics and Policy Studies faculty “are going to find homes in other departments and other programs across campus,” [...]

Economics and Policy Studies faculty members will continue to teach economics courses, McGreevy said.

Some gems from McGreevy follow, with my own sarcastic/half-baked replies.

The decision to dissolve Economics and Policy Studies was not an attempt to distance the University from alternative economic theories, [McGreevy] said.

Why bother distancing the university when soundproofing material is much cheaper?

“In the long run, we’re going to have more economic diversity, not less,” he said. “In the new Department of Economics, we’re going to want economic diversity.” [...]

Diversity within a narrower methodological scope, of course.

“It seems almost unfair for them to sit there without a chance for growth. It’s better to integrate them into other units on campus.”

You mean the chance for growth that you denied when ECOP put in requests to hire new faculty? That chance?

“We’ll have better conversations when we don’t have these two departments,” he said. “At the level of the economics conversation, [Economics and Policy Studies professors] will be able to contribute more by moving to a different department.”

Conversations are always better when conducted with one’s self, in privacy.

“I am committed to building a mainstream economics department at Notre Dame, but it doesn’t have to be monolithic,” McGreevy said.

Just no heterodox folks.

Another misconception is that “only the Economics and Policy Studies group cares about Catholic social thought,” McGreevy said.

The ECOE profs care, but not enough to integrate it into their teaching.

Although he said he is not motivated by rankings, McGreevy said they have some merit. “I think it’s unacceptable for Notre Dame to have a major department ranked 109,” he said.

It will be easier once they shed the deadweight who publish in ignored and marginalized journals. Let’s ignore any sociological defects within the discipline. Nothing to see here, folks.

“It’s important to build up a mainstream economics department. Notre Dame suffers if we don’t have that.”

Students interested in non-mainstream responses to the crisis? We’re ok with letting them suffer.

Sarcasm aside, this decision is a poor one for the students at Notre Dame and weakens the discipline as a whole. Of course, there’s still time to lobby the Academic Council members. It’s not over until…

Update (1/20): Read a follow-up post on an ECOP professor’s response letter to this story here.

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