Archive for May, 2010

Boston.com has a depressing series of photos from the BP oil spill, which may now equal 13 Exxon Valdez spills. Just remember that criticizing British Petroleum is un-American.

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I’ve got some weekend homework, reading and reviewing Paul Collier’s book. Meanwhile, you need to catch up on what you may have missed this week on this blog: Brian Williams’ commencement address at ND; the Rise and Fall of GDP; Happiness, Norms, and Discount Rates; Galbraith and MMT; and Panera’s name-your-price store.

Serious Links

Chris Hayes on some recent direct action- The Nation

Lant Pritchett on competing ontologies of economic development- CGD blog

Edmund Andrews likes the FinReg bill that passed the Senate- Capitals Gains and Games

Nick Rowe on the “silent shift” in macro though- Worthwhile Canadian Initiative

Mark Weisbrot on “success” in the EU periphery- MRZine

Wynne Godley has passed away- RWER

Robert Skidelsky on the language barrier and financial crises- Project Syndicate

Ted Rall says oil companies should be nationalized- Common Dreams

Will BP’s low oil spill estimate save it money?- McClatchy

David Roberts says to focus on outcomes, not mechanisms, for climate change- Grist

David Ruccio says that Rand Paul’s attitudes about discrimination are thoroughly neoclassical- Anti-capitalism

Rodger Malcolm Mitchell on what debt hawkery means in practice- Federal Debt is Money


This xkcd comic hits close to home:

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Panera Bread logo

Panera Bread is trying something new at a St. Louis location:

Panera Bread Co. has reopened a downtown Clayton location as a nonprofit where customers can pay what they can afford.

“Take what you need, leave your fair share,” says a sign at the entrance of the Saint Louis Bread Company Cares Café. Patrons who can’t pay are asked to volunteer their time.

The café, which reopened Sunday as a nonprofit, has cashiers who provide receipts with suggested prices and direct customers to the store’s five donation boxes. The menu is the same, except for the day-old baked goods brought in from sister stores in the area.

Okay so not exactly a free lunch, but this does throw a wrench into neoclassical theory’s law of one price.  There is no equilibrium price here; instead, people pay different amounts depending on what they have or want to spend. And some can even pay by volunteering their time. It’s not clear that general equilibrium analysis is at all useful for this type of market.

In addition, this model calls into question the conventional understanding of economic man, as even the CEO observers:

“I’m trying to find out what human nature is all about,” Ron Shaich, who stepped down as Panera’s CEO last week but remains as chairman, told USA Today. “My hope is that we can eventually do this in every community where there’s a Panera.”

Lastly, a nonprofit restaurant whose main goal is to cover costs is quite different from the profit-maximizing firm that we learn about in our economic theory classes. Maybe, economists also need alternative theories of the firm.

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Galbraith and MMT

Len Burman of the Tax Policy Center responded yesterday to Jamie Galbraith’s deficit comments that I blogged about last week. Galbraith, in responding, has revealed more of his own views about how government deficits and debt operate. They sound a lot like MMT.

Understanding that the US Federal Government can never be forced to default on bonds issued in US dollars, they will never be in a position to “demand” a hefty risk premium. Efforts to move into other assets — as several commenters on Burman’s own site pointed out — merely move the dollars around. Eventually they will end up in Treasuries, if the US Government makes the Treasuries available.But the US Government doesn’t actually need to make new Treasuries available. It can simply leave the banks with free reserves — in which case, they will bid up the price of the Treasuries that are available in the system…

Next, Burman presents the reductio ad absurdam:

“Taken to its illogical extreme, Galbraith’s argument implies that there is no limit to government’s borrowing capacity (and that the money never really has to be paid back). If that’s the case, why not dispense with the annoyance of taxes altogether?”

It is entirely true that the Federal debt can — and will — go on rising, in dollar terms, year after year. It has done so for several centuries already. But it does not follow that cutting taxes to zero would be wise. Taxes control effective demand, and they are also the main reason why people hold dollars in the first place. We need them.

Burman finally suggests that I believe that “deficit hawks are all anti government kooks who want to dismantle the social safety net.” I deny this.

The part about taxes, in particular, sounds a lot like MMT. There was also some back and forth in there about inflation, which Galbraith said can be avoided by containing health care costs. He could also add that inflation is only a concern when economic resources are fully employed.

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I want to draw attention to three mostly unrelated points. The first (which was in the friday links) is that Ben Bernanke devoted a commencement address to the economics of happiness. Here’s a notable excerpt:

Easterlin’s own view, taking an economic perspective, is that people’s happiness depends less on their absolute wealth than on their wealth compared with others around them…

Human adaptability, which I mentioned earlier, also helps to explain the Easterlin paradox. Rich or poor, you tend to get used to your circumstances. Lottery winners get used to being wealthier, and their psychological state may ultimately be not much different than it was before buying the winning ticket…

life satisfaction requires an ethical framework. Everyone needs such a framework. In the short run, it is possible that doing the ethical thing will make you feel, well, unhappy. In the long run, though, it is essential for a well-balanced and satisfying life.

Second, I thought David Ruccio had a keen response to Akerlof and Kranton’s Identity Economics piece:

I certainly don’t want to argue against the importance of social identities and norms within organizations, large and small…But Akerlof and Kranton’s is an impoverished notion of how social identities and norms work, and how they are reproduced over time.

First, they forget all about notions of fairness and justice, as frames of reference for organizational identities. If the existing norms are considered unfair or unjust, why should they be followed?

Second, they write nothing about power, much less notions of ideology, propaganda, or exploitation. For example, the panopticon works—it keeps people aligned with the correct functioning of the organization—because it induces a sense of permanent visibility that ensures the functioning of power.

Third, from the profile of Cass Sunstein, we see some wrong-headed discount rate thinking. At least the author brings up the ethical point:

In OIRA’s cost-benefit calculations, the government’s willingness to spend depends on…the social cost of carbon…All else being equal, if given a choice between paying $1 million now and $1 million five years from now, economists will choose to pay later…

The problem, Sunstein says, is that we might do irreversible damage to the planet while blithely waiting for the price of action to drop just enough…

The debates over the discount rate are less mathematical than moral. Spending money now to prevent climate damage that won’t appear for decades is a tax on present generations; declining to spend now is a tax on the future. The British government several years ago assigned the economist Nicholas Stern to value the cost of climate change. Stern’s vision was nightmarish…

As an academic, Sunstein seemed to side with economists like William Nordhaus at Yale, who set the discount rate at about 5 percent, which would counsel patience. “It’s not clear what direction the risk of error cuts in,” he told me. “If we err, 7 percent could be bad,” he said, but “if we err, 1 percent could be bad also.” A low a discount rate might protect the environment by spurring us to sacrifice now — while damaging the economy, increasing poverty and putting more people out of work…

So the strategy is too find a price that sounds right, and back the discount rate out? Seems so unrigorous.

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An impressive article in the New York Times by Jon Gertner called “The Rise and Fall of the GDP” is well worth a read. We gained a lot of information when the national income accounts began to be collected in the early 20th century, but of course GDP left much to be desired. In fact,  Gertner points out that obsessing over GDP may be dangerous, because it engenders growth-craving policies:

The G.D.P., according to arguments I heard from economists as far afield as Italy, France and Canada, has not only failed to capture the well-being of a 21st-century society but has also skewed global political objectives toward the single-minded pursuit of economic growth. “The economists messed everything up,” Alex Michalos, a former chancellor at the University of Northern British Columbia, told me recently when I was in Toronto to hear his presentation on the Canadian Index of Well-Being. The index is making its debut this year as a counterweight to the monolithic gross domestic product numbers. “The main barrier to getting progress has been that statistical agencies around the world are run by economists and statisticians,” Michalos said. “And they are not people who are comfortable with human beings.” The fundamental national measure they employ, he added, tells us a good deal about the economy but almost nothing about the specific things in our lives that really matter.

One exciting effort comes from State of the USA:

In the U.S., one challenge to the G.D.P. is coming not from a single new index, or even a dozen new measures, but from several hundred new measures — accessible free online for anyone to see, all updated regularly. Such a system of national measurements, known as State of the USA, will go live online this summer. Its arrival comes at an opportune moment, but it has been a long time in the works. In 2003, a government official named Chris Hoenig was working at the U.S. Government Accountability Office, the investigative arm of Congress, and running a group that was researching ways to evaluate national progress. Since 2007, when the project became independent and took the name State of the USA, Hoenig has been guided by the advice of the National Academy of Sciences, an all-star board from the academic and business worlds and a number of former leaders of federal statistical agencies. Some of the country’s elite philanthropies — including the Hewlett, MacArthur and Rockefeller foundations — have provided grants to help get the project started.

…The State of the USA intends to ultimately post around 300 indicators on issues like crime, energy, infrastructure, housing, health, education, environment and the economy. All areas of measurement will be chosen by members of the National Academy; all will be reviewed for rigor and accuracy by a panel of accomplished experts. With easy access to national information, Hoenig told me optimistically, Americans might soon be able “to shift the debate from opinions to more evidence-based discussions to ideally a discussion about what solutions are and are not working.”

Those involved with the self-defined indicators movement — people like Hoenig, as well as supporters around the world who would like to dethrone G.D.P. — argue that achieving a sustainable economy, and a sustainable society, may prove impossible without new ways to evaluate national progress.

Perhaps these efforts will challenge economists and the rest of society to think about human purpose. Pursue economic growth, but for what end? Our end purpose cannot be to make loads of money and then spend all day on the golf course. We need to be able to think about how to make our lives more fulfilling, and GDP hardly comes close to measuring that.

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Brian Williams

Congratulations to graduates! At the University of Notre Dame, Brian Williams gave a wonderful charge to the graduating class. (watch video here, read story here). He mentioned the role of Catholics in the world:

I’ve traveled the world and sadly that means I’ve walked through great destruction,” Williams said. “I’ve seen staggering loss…from Baghdad to Port-au-Prince to New Orleans, Louisiana. Where I’ve come across people suffering and dying, I’ve also found Catholic charities standing right there alongside me, ministering and soothing, helping and healing without regard to self, every one of them a shining, towering example of sacrifice and selflessness. Let’s make that what people think of when they think of the Catholic Church in America and around the world.

He mentioned other crisis that need to be addressed, including violence throughout the world, obesity in the USA, and the ongoing oil spill:

We are staring, make no mistake, at a slow-motion environmental disaster. It will destroy one of the richest wetland estuaries on the planet, and my urgency is because of this: my certainly that this institution, this graduating class, has the brain power to fix it. And now you’ve just been asked.

And probably my favorite part was his notion of patriotism:

The question is, when did we stop trying? 60 million of us are obese; we have a 17-percent poverty rate; and we’ve fallen to ninth now in global rankings of prosperity… We patriots, and I’m not talking about T.V. patriots whose belief is if you say it, loud and often enough, people will think you love your country more than you do. I am talking about those of us ordinary patriots who wake up every day, and love our country, and believe it’s the best place on earth and the best idea on earth. We patriots see the problem and we want to get better. This involves you.

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