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Archive for March, 2010

Some good news for undergraduates at Notre Dame! Political economy courses will continue to be offered to undergraduates in the Fall of 2010. This includes courses on the Political Economy of Development, the Political Economy of the Financial Crisis, the Economics of War and Peace, and Marxian Economic Theory, among others. In addition, at least one of the principles of microeconomics courses (Dr. Ruccio’s section) will expose students to alternative economic theories in addition to the firm grounding in neoclassical theory that all introductory econ courses provide.

Although I am not completely certain of the structural arrangement, these courses are all listed as ECON and so economics majors will have the option to fulfill part of their major requirements with these courses. This current arrangements allow for students at Notre Dame to receive a strong grounding in neoclassical theory and econometric methods as well as alternative economic theories: in a sense, the best of both worlds. To those who made decisions for these courses to be available:  many students and alumni are grateful.

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Friday Links

Here are your Friday links. Also, yesterday we had our first post from Kasey Dufresne, a friend of Notre Dame interested in economic pluralism. Kasey will be holding down the fort next week while I’m on vacation and will be a great presence here in the future.

Serious Links

Ed Fullbrook is impressed by David Brooks’ column on the future of economics- (RWER)

Jamie Galbraith calls BS on Alan Greenspan’s new paper- (HuffPo)

Deforestation is slowing, but still a huge problem- (BBC)

Blast from the past: a 1996 plan to end poverty published in The Nation- (CommonDreams)

Elizabeth Warren profiled- (NYT)

Finance as an ecosystem- (FundStrategy)

Rick Wolff on Harvard’s special place in society- (MRZine)

An organic rice farmer in Louisiana- (NYT)

Diversions

Is this the future of text? Meh.

When a hockey fight becomes a spectacle unto itself:

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Freefall, Joseph Stiglitz’s most recent book on the economic crisis, contains an interesting chapter dedicated to “Reforming Economics” where the author explains that “Economics had moved… from being a scientific discipline into becoming free market capitalism’s biggest cheerleader.” For a mainstream economist, he makes some strong critiques of neoclassical economics. For example, he writes that Arrow and DeBreu proved the existence of general Walrasian equilibrium under conditions “so restrictive as to question the relevance of the view that markets were efficient at all.” He challenges the existence of perfect information and that preferences should simply be taken as given. Regarding the notion of rationality: “I soon realized that my colleagues were irrationally committed to the assumption of rationality.” He also challenges the use of the representative agent in macroeconomics, which is the core of the Dynamic Stochastic General Equilibrium models used in graduate macro courses everywhere across the country.

What strikes me most, however, is how little of these ideas undergraduate economics majors are exposed to (much less the general public). Even intermediate theory courses do not touch on DSGE or the restrictions necessary to prove the existence of full General Walrasian Equilibrium or ask why preferences are simply taken as given. Undergrads are lucky if they even learn the names of Arrow and DeBreu. I agree with Stiglitz that these reforms sound nice. But how can this reform actually happen? Especially when no one can assess to what extent the ideas of economists caused the crisis because even undergraduates are not taught what economists really believe.

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A new NBER paper (h/t Thoma) by Richard Burkhauser and Kosali Simon says that it does. From the abstract:

 We show that ignoring the value of health insurance coverage will substantially understate the level of economic well being of Americans and its upward trend and overstate the level of inequality and its upward trend.

This argument is one of the key ones we often here to rebut the wage/productivity divergence we’ve witnessed in the last thirty years. It’s definitely landed me in uncomfortable “gotcha” moments at times. However, digging into the paper a little bit, the argument is left a bit wanting.

If we accept the methodology, the results are robust. For instance, using the standard measure of income, the 90/10 ratio increases from 8.3 to 8.5 from 1995 to 2008. Using their measure of income including health insurance, the ratio decreases from 9.3 to 9.1 over the time period. Similarly, instead of having the Gini coefficient increase from 0.422 to 0.433, it increases only slightly, from 0.396 to 0.398. With the new measure, income gains are much broader across deciles; except for the lowest 10%, income gains are uniformly higher as one moves down the income distribution.

I have two issues with this study:

1) They use the insurance value of health care in all cases, including Medicare and Medicaid, when we all know that costs have increased over time while quality has remained stagnant. Thus, as a measure of economic well-being, their “total income” metric will almost certainly overstate the reality. Further, health insurance “income” is a much higher share of “total income” at the bottom of the distribution, so the exercise will naturally lead us to less inequality. My suggestion would be using cross-country metrics of health expenditure to capture the well-being. With this change, the added income would likely be reduced by half and the picture would be much different.

2) The authors will inevitably argue that their study is positive economics, not normative. They are right; in fact, much of their paper could be construed as an argument in favor of health care reform. My concern is that many will take their paper as a sign that we should worry less about wage inequality and its systemic drivers, especially if health care is the main explanatory factor. I think their analysis is useful, because of my reservations above, I worry it might be useful for wrong and normative purposes, and the systemic causes of wage inequality are ignored enough as is.

So, to answer my question from the title, I think health insurance does reduce inequality, but less so than the authors state insofar as we are concerned about economic well-being.

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I saw a film last night called Lords of Nature: Life in a Land of Great Predators, which demonstrated that the elimination of great predators can have vast effects on their ecosystems. Predators in general have been run out of the lower 48 states; in particular, the absence of the wolf in places like Yellowstone National Park, Minnesota, and Wisconsin has had surprising effects on the forests they used to stalk. The basic argument in the case of wolves is this: wolves prey on deer and elk, whose foraging stunts the growth of new forest flora, leading to tree decline and thus struggles for lower species and the landscape itself.

The filmmakers pointed to a number of examples, including Yellowstone and Zion National Park in Utah where tourist fears of wolves led to their expulsion from these areas and thus to the decline of the overall ecosystem. Wolf reintroduction has been successful in restoring the ecosystems. Thus, the next frontier for wolf reintroduction are areas where human conflict is more direct- with cattle ranchers in the West and sheep herders in the North. However, concerted efforts among government agencies, NGOs, and even Deer Hunter Associations have allowed successful cohabitation of domesticated livestock and wild predators. Targetted herding can ensure that wolves primarily prey on the overpopulated deer and elk, and not on valuable livestock.

Of course, the buildup to the predators’ decline was decidedly human. Shortsighted interventions aimed to protect “assets” and maximize profits led to the one-sided demonization of particular species. Forgive me if I’m reaching as I argue this case is an example of capitalism’s unilateral drive for profit and ignorance of their long-term folly.

A not dissimilar thing is happening with bee colonies- the New York Times has an article about the collapse of wild bee populations and the failure of domesticated beehive increases to compensate. The problem isn’t necessary bee collapse itself- it’s that humans are asking too much of them.

This wouldn’t mean the end of human existence, but if we want to continue eating foods like apples and avocados, we need to understand that bees and other pollinators can’t keep up with the current growth in production of these foods.

The reason is that fruit and seed crops that are most dependent on pollinators yield relatively little food per acre, and therefore take up an inordinate, and increasing, amount of land. The fraction of agriculture dependent on pollination has increased by 300 percent in half a century.

What happens when lands are converted for crops? Wild bee populations decline:

The paradox is that our demand for these foods endangers the wild bees that help make their cultivation possible. The expansion of farmland destroys wild bees’ nesting sites and also wipes out the wildflowers that the bees depend on when food crops aren’t in blossom. Researchers in Britain and the Netherlands have found that the diversity of wild bee species in most regions in those countries has declined since 1980.

Human replacement of wild bee populations can only go so far, and it cannot replace the biodiversity necessary to sustain an ecosystem. Of course, this aspect was present in Lords of Nature as well. The presence of great predators does not just favor certain types of flora in a zero sum-game; it also forces the rapid evolution and adaptation of fauna, creating a bevy of biodiversity. Try as we may, we’ll never be able to put a value on this biodiversity. As these episodes point out, ecosystems are complex, and it’s very arrogant for humans to assume that simple valuation will preclude unintended consequences.

Reducing human impact on nature is a good in and of itself. It may mean sacrifices as well:

If we want to continue to enjoy almonds, apples and avocados, we have to cultivate fewer of them, more sustainably, and protect the wild bees that help make their production possible.

Similarly with the predators, we may have to be willing to pay more for livestock goods and consume less, as further predator reintroduction will result in losses. However, the benefits that come from these sacrifices appears to compound over time, so it’s necessary that we not underestimate the value of nature.

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Friday Links

Only serious links today, sorry. Enjoy the weekend!

Serious

Ellen Brown on the movement for publicly-held banks- (YES!)

Irony (or not), Texas, and Hayek- (Sociological Imagination)

Bill Easterly also attacks the discrediting of Hayek based on citations (Aid Watch)

Minsky and Ecology- (Macroeconomic Resilience)

From last summer: Daniel Little on Polanyi- (Understanding Society)

Rortybomb on lobbyists and financial regulatory reform- (Rortybomb)

How can the G-20 help the poor?- (Brookings)

Crisis fiscal policy has been more of the same (pdf)- (MRZine)

David Ruccio on hegemony- (Anti-Capitalism)

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Alan Greenspan will present a paper at Brookings tomorrow (I didn’t get an invite) on the causes of the financial crisis. According to the New York Times, Greenspan acknowledges that there was a bubble, but says that there would have been no way to identify it or pop it. Instead, he writes,

Unless there is a societal choice to abandon dynamic markets and leverage for some form of central planning, I fear that preventing bubbles will in the end turn out to be infeasible. Assuaging their aftermath seems the best we can hope for.

Isn’t this similar to the argument that Karl Marx made 160 years ago? Or Minsky 60 years ago?

Greenspan’s solution is certainly different, and he doesn’t believe that the contradictions that necessarily cause these bubbles will also cause capitalism to end. However, the diagnosis is distinctly Marxian/Minskyian. It certainly doesn’t seem Hayekian.

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This post has literally nothing to do with economics.

For basketball fans, however, Christmas has arrived. Even better, the Notre Dame Fighting Irish are in the tournament and are playing this afternoon. Go Irish! Beat Monarchs!

Below are my picks…

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Via Meteor Blades, Guernica has an article about how the social division of labor arose and how we might move beyond it as we recover from the current economic crisis.

Instead of putting forward, as so many of our elected officials, policy analysts, pundits, and journalists predictably do, a picture of our world that is essentially the same, except that it is somehow “green” and somehow peopled with college-educated or better “trained” workers, we need to focus our attention on the more pressing and more basic question of what kinds of work people should be expected to devote their lives to doing. The last time this question—the question of meaningful, satisfying, dignified labor—got a public hearing was in the nineteen sixties and seventies, with Harry Braverman’s Labor and Monopoly Capital being the intellectual high-water mark. What Braverman convincingly demonstrated is that there is nothing natural or inevitable about our system of labor; that it came about through conscious decisions made by industrial capitalists in the name of profit for them alone…

Rochelle Gurstein, the author, makes an explicit connection with this division and the beginning of environmental issues:

We must also keep sight of the historical fact that not only did monopoly capital and the division of labor emerge together in the last decades of the nineteenth century, but so, too, did those alarming “plague clouds” and a sun that was “blanched” rather than “reddened”—those first unmistakable signs of industrial pollution that John Ruskin decried in a lecture entitled “The Storm-Cloud of the Nineteenth Century” (1884). To address one of these historical developments without the other two is to ensure that we will never move beyond the narrow confines of current thinking…

The problem, however, is that our current way of thinking about jobs is deeply ingrained:

It is worth recalling the profusion of skilled practices that once existed…Over the last century and a half, however, the social division of labor penetrated ever more dimensions of daily life…Thus it has become increasingly difficult to imagine how to revive what has vanished both from practice and from memory, let alone how a world might come into being where the greater number of things we use or, better yet—to suggest the enormous change in consciousness that is required—things we enjoy using in our daily life are made by people who enjoy making them.

Is the organic and local food movement a good analogy for a way out?

It seems to me that a good starting point for how to bring about a similar revolution in thinking and practice when it comes to work is the principle that just as monoculture is disastrous for our health and security when it comes to food, lack of variety in work is just as disastrous for our well-being and happiness. The ideology of ceaseless economic growth, made possible by the division of labor that has filled our world with ugly things from the Styrofoam cup to smog in our skies, has always been vapid and destructive. Now, with the implosion of the global financial system, the American way of life as model for global expansion stands exposed as unsustainable as well.

There really are limits to our vision of what the world can look like in the future. It’s relatively easy to imagine what our world might look like in 5 years, but 50 years off is an entirely different story. Most people, myself included, get a headache when confronted with the issues presented by “futurists.” However, as cheesy as this sounds, (and copying from a World Social Forum’s slogan), another world is possible. Perhaps the co-op movement, which I am very excited about, holds some promise for a rethinking of the social division. Worker-led appropriation and distribution of surplus is radical enough, but what if the role of “worker” is rethought entirely as well? I’m not just talking about rotating folks through different assembly-piece jobs, but something deeper.

In this regard, I’m reminded of a recent episode of The Office, which has unintentionally uncovered a number of deep truths about work throughout its run. In this particular instance, a warehouse worker (the head of the warehouse), makes a suggestion about how to implement a new inventory system, including a sketch of how it would work. His boss scoffs (there’s also a racial tension, as the boss is white, but the warehouse worker is black), but the boss’ new boss is impressed and gives the warehouse head an office upstairs.

It’s a trite example, but it underscores the improtance of subsidiarity, that those closest to the impact of a decision should be involved in making it. In fact, deeper principles like subsidiarity or sustainability might provide the way forward for this rethinking. We don’t know what the world will look like in 50 years, but we do know the basic principles around which it should be structured. Better yet, we can apply these principles in a citizen-led movement that doesn’t require government policy, which Gurstein points out is quite tone-deaf to these concerns. That gives me some hope.

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This image should provide a nice response to any friends or otherwise who claim that this winter is evidence against global warming (not that intelligent people need further evidence). It shows departures from average surface temperatures from December, 2009 through February, 2010.

(Photo is from NASA GISS via the Washington Post)

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