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Archive for May, 2010

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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Congraduations!

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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This week we talked about: closing a philosophy department; Catholic economists; deficit falconry; the econ-enviro value gulf; and the Revere Award. Of course, most of you already know that as RSS subscribers, right? (Yes, these shameless RSS plugs will stop soon.)

Serious Links

The EU is bleeding its patient, says Mark Weisbrot- MRZine

An over-my-head debate on the importance of social theory (post and response)- Understanding Society & Anti-capitalism

Deconstructing “poverty porn”- Perspectives of Poverty

Google’s take on saving the news industry- The Atlantic

The oil spill might be much larger than the government and BP are reporting- NYT

The EPA is stepping to the plate with GHG rules- NYT

Good thing, because the Senate probably won’t- Ezra Klein

Did China or India (or Obama) sabotage Copenhagen?- Der Spiegel

What’s the deal with professional economists?- Rodger Mitchell

How subprime whistleblowers were silence- The Investigative Fund

Ben Bernanke on happiness economics– Federal Reserve

Diversions

A woman’s story about her enormously embarrassing husband- Times of London

Don’t get caught in a bad hotel (some cool union activism)

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The Real World Economics Review Blog announced the winners of the Revere Award for

the three economists who first and most clearly anticipated and gave public warning of the Global Financial Collapse and whose work is most likely to prevent another GFC in the future.

I voted for Keen, Baker, and Stiglitz (who came in 4th). Roubini is way too hawkish (deficit style, that is) for my tastes, although I haven’t read enough of or about his work to divine a guiding paradigm. Stiglitz obviously has his shortcomings, but he’s probably the best prominent economist available in the mainstream for the award’s stated cause. As for Keen and Baker, they’re simply all-stars. I’m sure some others on the list are as well, but I didn’t know enough about them to cast an informed vote. More info on all the finalists here.

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I just started reading Paul Collier’s new book The Plundered Planet: Why We Must–and How We Can–Manage Nature for Global Prosperity, which was released this week. I’m going to do a proper review of it in a couple of weeks, but the first chapter struck me in light of my post from two weeks ago about why environmentalists don’t trust economists. In the book, Collier will apparently try to play the role of referee between two factions- romantics and ostriches. Romantics are skeptical of growth and want to preserve at all costs, while ostriches will plunder nature for the cause of economic growth.

Although many may not admit it, I think there are a lot of both types within the margins of the environmental discussion. There are enough, in fact, to build the mistrust I was posting about. Collier attributes the existence of both camps to a misinformed public. Interestingly, though, he seems to ascribe more blame to economists, who treat nature “as they do any other asset…to be exploited for the benefit of mankind.” He then aptly cites Nicholas Stern (whose higher carbon price has been mostly ignored since its release in 2006), who has argued that the issues with climate change “are not technical, but ethical.”

His words for economics are harsh:

As adopted by economists, Utilitarianism is an austere, universal value system that is impossibly demanding…Given the gulf between the values economists use to judge the world and the values they assume ordinary people to hold, many economists conclude that ordinary people cannot be trusted adequately to protect the interests of the future.

That value gulf, I think, is the key issue. Economists don’t just dislike the values of environmentalists- they don’t trust them to the point that they position themselves to make value judgments, hidden in technospeak. Environmentalists know this and thus don’t trust them, and we end up with a vicious cycle that radicalizes both sides and results in mistrust. Will Paul Collier broker a compromise? Stay tuned.

Disclosure: I was sent a copy of the book by the publisher, Oxford University Press. This post and my forthcoming review are of my own volition, not in exchange for receipt of the book.

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But is should be. That’s my conclusion after seeing liberal blogger Ezra Klein’s tweet about his interview with James Galbraith:

James Galbraith weighs in with a very uncommon take on the deficit.

The headline he puts on the story:

Galbraith: The danger posed by the deficit ‘is zero’

Here’s are some excerpts from Galbraith in their exchange:

At this point, the whole thing is completely incoherent. You cannot write checks to 20 percent to anybody without that money entering the economy and increasing employment and inflation. And if it does that, then debt-to-GDP has to be lower, because inflation figures into how much debt we have. These numbers need to come together in a coherent story, and the CBO’s forecast does not give us a coherent story. So everything that is said that is based on the CBO’s baseline is, strictly speaking, nonsense…

What people worry about is that the federal government won’t be able to buy bonds. But there can never be a problem for the federal government selling bonds. It goes the other way. The government’s spending creates the bank’s demand for bonds, because they want a higher return on the money that the government is putting into the economy. My father said this process is so simple that the mind recoils from it…

Since the 1790s, how often has the federal government not run a deficit? Six short periods, all leading to recession. Why? Because the government needs to run a deficit, it’s the only way to inject financial resources into the economy. If you’re not running a deficit, it’s draining the pockets of the private sector.

Nothing groundbreaking here, at least for this blog’s commenters and folks who read billyblog. The reason Ezra brands this take “uncommon” is because among “respected voices” (pardon my use of scare quotes), it really is uncommon. It’s very difficult to be a respected liberal or progressive if you don’t cow at least a little to deficit hawkery. The good news is that Ezra has a lot of readers in the mainstream, and Galbraith did an excellent job making digestable the sensible view on deficits.

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A Poverty of Ideas

This story from The Guardian strikes too close to home:

A university’s decision to shut its philosophy programme has sparked concerns about the future of the humanities and become a cause célèbre for intellectuals around the world.

Students at Middlesex University, in north London, are engaged in a lengthy “sit in” over plans to phase out philosophy teaching at their campus, a decision they claim is ideologically driven.

Some of the world’s leading philosophers have waded into battle, declaring in a letter that the closure is of “national and international concern”. The controversy is a sign of things to come as cutbacks are made in humanities departments across the country.

Middlesex’s Centre for Research in Modern European Philosophy, an international leader in subjects such as critical theory, aesthetics, Marxism and psychoanalysis, is now in jeopardy.

And the reason given for closing the department? Simply financial:

In an open letter to his colleagues and students published last month, Professor Peter Hallward, programme leader for the MA programmes in philosophy at Middlesex said: “The dean explained that the decision to terminate recruitment and close the programmes was ‘simply financial’, and based on the fact that the university believes that it may be able to generate more revenue if it shifts its resources to other subjects.”

It’s always been my understanding that business and science programs generate more income than humanities for univiersities, and so they pay their faculty a great deal more. I’ve heard that one of Notre Dame’s gravy trains is the Mendoza School of Business. But I am still unclear as to exactly how and why these programs are so profitable. If anyone has sources on this I would greatly appreciate the comments, because it seems like an important thing to understand if we want to change the trajectory of the state of the liberal arts in higher education.

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