Krugman, Inequality, and the Crisis

There’s nothing original here (and apologies for the less-than-clever subject). I just wanted to do a drive-by and point out/quote approvingly a couple good posts from David Ruccio about Paul Krugman’s role of inequality and the crisis. First,

Krugman’s clearly in trouble, and his mainstream economics training is not much help. So, let’s offer him some assistance: First, he needs a theory of inequality, a theory of value that explains the conditions and consequences of the growing gap between wages and productivity. Call it a theory of exploitation. Then, he needs to trace the effects of growing exploitation on both wage-earners (who go into debt to maintain consumption) and profit-takers (who funnel one portion of those profits into the salaries of managers and another portion into new financial instruments). Call it a theory of financial fragility based on capitalist exploitation.

Then, after reviewing some a new CBPP report, Ruccio concludes that the tax code is not a sufficient mechanism to address inequality:

So, if we want to understand the links between inequality and capitalist crises, we need to start by analyzing the growing gap in the distribution of income prior to the onset of the crises. And if we want to eliminate that gap and avoid the next crisis, we have to move beyond the class structures of capitalism that created them in the first place.

Also, unrelated, Ruccio has a nice post on the anti-blog essay that has gotten so much attention the last few days. I’ll just chime in that I feel perfectly inadequate at doing anything other than questioning, but that there is real value in that, and other bloggers who do the same should keep it up. I’m aware that I often go well past the questioning stage and into providing answers, but it’s usually just thinking out loud. I’m guessing this is the same for many other bloggers too, who are seeking some sort of discourse. The more bloggers we have, the wider and more heterodox the discourse can be.

Finally, I’m vacation-blogging from Germany, so I’ll have a few thoughts tomorrow based on anecdotal observations from the country. Sneak preview: the landscape, citizenry, and architecture are way more awesome than the deficit hawks at the top of their government.

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Agricultural Revolutionaries, Part 6

WWOOFers [ht:ss]

[This post is the sixth and final in a series that looks at different efforts to build a more sustainable food system in the United States. These efforts challenge us to think about food as not just a commodity, but more as a relationship with the Earth. Feel free to leave any other interesting food movements, organizations, or “revolutionaries” in the comments]

World Wide Opportunities on Organic Farms is a worldwide movement that facilitates the placement of volunteers on organic farms. Farmers who grow organically or use ecologically sound methods on their farms host volunteers who want to learn about these farming methods. Typically, the volunteers are not paid, but the hosts provide living accommodations, food, and technical knowledge in exchange for help on the farm. Volunteers can participate for anywhere from a few days to several years.

According to their website, WWOOF networks are spread over 90+ countries and include more than 7,500 hosts and 100,000 volunteers. Not only does this movement support sustainable living and food, but it also does so in a non-capitalist way. The exchange of labor for lodging, food, and knowledge does not occur on a free market, and does not include capitalist processes. Instead, the WWOOF website says, volunteers “usually live as part of the family.”

WWOOF USA provides this networking for farms across the country, and a look at the map on the homepage shows an impressive organization, with connections to dozens of farms in every state. Their mission statement coincides with what I would call “agricultural revolutionaries”:

World-Wide Opportunities on Organic Farms, USA (WWOOF-USA) is part of a world-wide effort to link volunteers with organic farmers, promote an educational exchange, and build a global community conscious of ecological farming practices.

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Destructive Tar Sands Oil

Via Mark Thoma, tar sands oil is another example of resources that should perhaps be left in the ground- especially for wealthy countries like the US and Canada, who are far along the Kuznets curve, but also for developing countries.

News reports about chemical tests are never as dramatic as the sight of oil-drenched birds and fish.  Maybe that’s why a study released in 2007 did not prompt a dramatic response from environmentalists in the lower 48.  In that year, an ecologist with Treeline Environmental Research issued a report finding high levels of carcinogens and toxic substances in fish, water, and sediment downstream from the tar sands fields.  The New York Times quoted a local health official as saying, “For years the community has believed that there’s lots of cancer.  When they drank from the water, there was an oily scum around the cup.  We now know that there is something wrong.”  At the time, an Alaskan research scientist commented, “This could actually be worse, in some respects, than the Exxon Valdez.”

I’ll probably be posting more rejoinders to my review of Collier’s book in the future. This is just another reminder (along with mountain top removal, for example) that it’s not just romantic environmentalists who want to leave depletable resources in the ground.

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Natural Resource Stewardship: Economics, Ethics, and Organizing

I’ve been chewing on this review for a while, but I think I need to just post the darn thing, so here goes (and as a disclaimer, I was sent a review copy of this book, although I was not directly solicited or charged to write one). As an added disclaimer, well, look at the time stamp on the post- I tried my best to weave together some disparate threads and half-thoughts…the principle of charity is my friend on this one.

Several weeks ago, I wrote about the introduction to Paul Collier’s new book, Plundered Planet. The chapter touched on something that is receiving more focus in the environmental economics discussion, the notion that ethics and value judgments can enter into the debate. And, of course, they must; I know that I harp on the discount rate constantly in this space, but when dealing with complex climate models, this rate is both incredibly important and wholly non-arbitrary. How we value the future is necessarily a value judgment. Other issues like cross-national equity pale in comparison to this one, and I’m glad Collier emphasizes this point. However, as I describe below, I think his book fails to move the ball forward in our understanding of environment action in some very key ways.

His entry point for talking about this critical issue is the “ethics of custody,” in which we are custodians or stewards of scarce and depletable natural resources. As a student of Catholic social tradition, which uses the language of stewardship, I really appreciate this language. It’s an all-too-rare normative statement in a discipline focused on making purportedly positive judgments. Economists, as citizens of the world, should be able to make these ethical statements, and transparently so.

Rather then spend the whole book on climate change, Collier, a development economist through and through, spends the greater part of the book discussing the tensions of governance and resource stewardship in developing countries. These issues, as you might guess, are thorny. There are so many corruptible steps in which plunder, as Collier calls it, can occur, and he readily admits that it’s highly unlikely that each of them will go as they should. Instead, Collier seeks an expansion of transparency, such that resource extraction is met with accountability in at least some stages. His involvement in initiatives to foster this transparency is laudable, but he admits they may not be a cure-all.

While his coverage of resource-use issues is thorough, he makes a key conceit when dealing with depletable resources. He seems to gloss over the externalities of extraction in favor of maximizing their long-term benefit stream. Granted, developing countries would be much less polluted if resources were extracted at a rate in keeping with Collier’s ethics, which would leave much more in the ground for future generations. Neverthless, it was at this point that I became frustrated with Collier’s repeated dismissal of “romantic environmentalists,” who supposedly have a disdain for economic growth. As it turns out, Collier can only temporarily set aside his economist hat, and he lets a one-sided notion of “development” carry the day. By ignoring things like the BP oil spill (or the decades-long pollution of the Niger Delta), it is he who seems romantic. Undoubtedly the extraction of resources involves the plunder of myriad other natural resources with less easily measured value.

What’s problematic is that Collier’s other glossings-over likely alienate those most important to the movement- it’s the “romantics” who are most likely to step up and act, and their involvement requires a holistic ethic. Decrying plunder while encouraging extraction that maximally beneficial from an economic standpoint is philosophically and practically dissonant.

Thus, it’s problematic that when Collier zooms out to issues global governance with respect to climate change, he argues that grassroots understanding of climate issues- a form of transparency, no doubt- are paramount. He eschews global frameworks, but instead hopes that citizens demand their politicians act at a national level to price carbon in an internationally consistent manner. This general mindset is apparently in keeping with his ethics of custody approach. Citizens motivated to act as custodians can and should rise up together to speak for future generations. Unfortunately, given the recent collapse of efforts in the US Senate for a relatively watered-down climate change bill, it’s hard to believe that a bottom-up movement will result in effective measures. While ever cognizant of the political economy of plunder in developing countries, Collier seems to miss the information asymmetries in the US’s political economy, in which information is distorted, corporations assert their will by way of access, and citizens are unable to really affect the process.

I have no idea if Collier is aware of the effectiveness of community organizing, but I doubt he’s referring to it when he calls for a bottom-up approach. Instead, I’m guessing that he’s hopeful a movement (better and stronger this time, we promise!) will emerge, forging a citizen’s consensus on climate change. While the process may be time consuming, I think it may be time for environmental advocates to take a step back, realize that their movement building has failed, and build an organization. What is interesting is that his ethics of custody could actually serve as a unifying framework for such an organization.

I’ve gone off the rails a bit here, but ultimately, Collier’s final chapter is a call to action, and I just found it a little lacking in substance. The meat of the book is incredibly instructive for folks who care about natural resources. The problem, though, is that Collier doesn’t seem aware of what action looks like on an issue as big as climate change. Transparency, as his initiative on mineral plunder shows, is certainly important, but so is power. It’s unsurprising, but still disappointing, that this economist fails to see that. While not directly related to his seeming misunderstanding of the romantics, it seems both oversights are cut from the same economist cloth. I appreciate Collier’s intent- understanding the normativity of these judgments is important, but at this stage in the game, it’s more essential that we know how to act.

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Phone companies supporting the right-wing

From MotherJones, some bad news for those of us anti-right wing cell phone users….

Credo Mobile claims to offer an alternative, as they are a phone company that only donates to environmental and liberal campaigns (peace, social justice, the environment, gays rights, civil rights, voting rights…)

Regardless of one’s political beliefs, it is an interesting way for a company give consumers the opportunity to influence the world. We’ll see if the marketing strategy works. Although honestly I would prefer that no phone company donated any money to any type of political campaign, and by saving money they could offer us cheaper plans….

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Economies for Profit or Consumption

When economists cheerlead GDP figures, they do so based on the supposedly positive judgment that growth implies consumption gains, which means that people are better off. There’s good reason to be skeptical of this claim, even leaving aside distributional concerns. Robert Reich, in discussing China’s currency announcement, speaks well to the issue of a production versus consumption economy:

Here’s the awkward truth that’s not openly discussed on either side of the Pacific: Both the United States and China are capable of producing far more than their own consumers are capable of buying. In the United States, the root of the problem is a growing share of total income going to the richest Americans.

Inequality is also widening in China, but the root of the problem there is a declining share of fruits of economy growth going to average Chinese and increasing share going to capital investment.

Both our societies are threatened by the disconnect between production and consumption. In China, the threat is civil unrest. In the United States, it is a prolonged jobs and earnings recession which, when combined with widening inequality, could create a political backlash.

Unfortunately, political divisions tend to obscure the real class divisions here in the US. Absent some key distractions, I think the working class would prefer a society in which production implies consumption, while the capitalist class prefers a society in which production implies profit. Political bickering gets in the way of exposing this key difference, and seems to make consumption less virtuous than production. Worry not, though- consumption is happening, just not for the masses. Will China prove to be different, as citizens demand a higher level of consumption still far below what we have in the US?

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The Self-Contradictory State of Economics

There are hardly any (mainstream) economist that will disagree with the claim that perfectly competitive markets lead to the most efficient outcomes. These markets should have no barriers to entry, nor be dominated by any agent or group of agents.

Mainstream economists are also eager to encroach on other fields of study, especially to do the other “lesser” social sciences better than the other social scientists. It would seem, then, only appropriate that they should eagerly apply their ideas to the study of knowledge. A neoclassical perspective on knowledge encourages what many have called a “marketplace of ideas.” This marketplace should have an abundance of competing hypothesis, all critically examined, to produce the best knowledge for our society. And there should be no dominant practitioners, who might exert excessive market power and find us in an inefficient market (of knowledge). Inefficient knowledge would mean that we would not have the best science possible.

But in the current state of economics, there are enormous barriers to entry and the “marketplace of ideas” is hardly competitive. Neoclassical practitioners keep the gate of the profession by controlling the economics departments at the top research universities and the “top” economic journals. Mainstream economists do not take any competing hypothesis critically because they do not even understand the basic ideas of any heterodox economic program, nor do they care to.

This exclusory attitude towards competing hypothesis is contradictory to the tenets of neoclassical economic theory.  Any hypothesis that competes with neoclassical economic theory is dismissed as “not economics.” It should then come as no surprise, even the logical conclusion, to the neoclassical economist that the current market for economic knowledge is inefficient. And our society cannot possibly have the best economic science. We can do better.

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Behavioural Economics and Power

I think James Kwak makes some great points on applying behavioural economics to the current crisis. We must not let that approach excuse the worst of corporate excesses:

First, it doesn’t do to say that ordinary people are irrational in making ordinary everyday decisions, and therefore we have to accept that companies will be irrational in making big decisions — like, say, whether to drill holes in the Earth’s crust a mile under the ocean. As they say, people make big bucks to make these decisions, and we expect them to use a little more reasoning than the kind we evolved on the African grasslands…

The problem is that there is a systematic bias within these companies against certain assessments and in favor of others. That is, the guy who shouts, “Danger! Danger!” will be ignored (or fired), and the guy who says, “Everything’s fine, the model says disaster can strike only happen once every hundred million years” will get the promotion — because the people in charge make more money listening to the latter guy. This is why banks don’t accidentally hold too much capital…

On top of that, it isn’t even true, as a matter of fact, that the companies involved failed to estimate the risk of disaster…

This isn’t inability to quantify the likelihood of unlikely events; this is willfully looking the other way.

Thaler also wants to make the point that regulators are incapable of understanding the complex technologies involved, whether in finance or in oil exploration. But while this is undoubtedly true to an extent, it also misses the main point.

The most frightening part of Lustgarten’s interview has nothing to do with BP. It’s about the use of hydraulic fracturing (or “fracking,” apparently with no intended reference to Battlestar Galactica) to drill for natural gas. In fracking, a mixture of water and chemicals is injected underground under extremely high pressure to break up rock formations and release trapped natural gas bubbles. According to Lustgarten, there is no scientific understanding of what happens to those chemicals — many of which are toxic — and whether they end up in our drinking water. Yet the Energy Policy Act of 2005 forbids the EPA from regulating fracking under the Safe Drinking Water Act — by simply stipulating, without proof, that the chemicals are removed after being used, and therefore there is nothing to regulate.

If this reminds you of the Commodity Futures Modernization Act, it probably should…

This is what happens when you have a weak regulatory agency crippled by pressure from above (and political appointees who are opposed to regulation) and a private sector that simply does whatever it pleases in pursuit of profits. It’s not individual irrationality; it’s power, pure and simple. Free market economics has already whitewashed enough egregious corporate behavior. Let’s not repeat that mistake with behavioral economics.

Combining behaviorial economics with power analysis would be an excellent step towards making it a form of real-world economics. Power analysis would help provide some of the “why?”, not as in “why do people make certain decisions,” but “why are certain people in position to make those decisions?” The preferences that are behind decision-making are not merely exogenous either. I think behavioral economists understand these concepts at an intuitive level, but I don’t think they sufficiently incorporate them into their formal models.

 

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BP’s corporatism

Douglas Rushkoff understands the bigger picture implications of how the Obama administration handles the BP oil spill. This, of course, relates to the problem of corporate personhood stemming from limited liability, and opens up space for us to think about alternative approaches to the firm in our society.

In the latest round of empty fist waving by Obama and apologetic posturing by BP, the President raised the issue that while BP has spent a few tens of millions on the cleanup effort and damages so far, the company’s annual dividend to shareholders is about $10.5 billion. The company is acting as if all its resources are being diverted to address this spill, when – financially anyway – this is clearly not the case. So as a way of changing the widespread perception that it is underspending on the crisis, BP suggested it might “suspend” – meaning pay later, not never – its quarterly dividend. A gesture of goodwill.

What a brilliant move. By suggesting they might suspend their dividend, BP initiated widespread panic about what would happen if that dividend were compromised in any real way. All of a sudden, business newspapers and cable channels begin calculating just what this means for shareholders – those people and institutions who park their money in an oil company and expect returns. How many pension funds have invested in BP? And how many retirees in England have made the oil a company a central part of their retirement portfolios, and are depending on these dividends to maintain their quality of life?

So now, instead of an transnational oil company against the American gulf fishermen, beach workers, and ocean itself, it’s the interests of presumably innocent British pensioners against American workers. We’re supposed to limit BP’s liability for wrecking our lives and our planet, because of the impact that appropriate penalties will have on those collecting dividends off the oil company’s crimes against us. This means bailing out the company by using government funds to pay for its spill.

[Photo design by J-cal76 at LogoMyWay, ht:dfr]

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Agricultural Revolutionaries, Part 5

Local Producers

Better known for bygone things, as the former home of Studebaker and now the former home of the College Football Hall of Fame, the city of South Bend, IN is looking towards the future in food. The efforts of local activists have recently put the city on the cutting edge of local, urban, and sustainable food movements.

The Unity Gardens, Inc. are hoping to build a community with fresh, locally sourced food widely available to all who need it. Founded just two years ago, the gardens promote neighborhood and community gardens throughout the city, on any open space that can be found including vacant lots and public spaces. You can follow the Unity Gardens on their blog, which claims that the Unity Gardens were founded to grow food and communities within a framework of sharing. As the motto states, “We are growing more than vegetables here!” Aside from providing food, they hope to bring together people from diverse backgrounds to build a stronger community and economy.

Closely related is South Bend’s Garden Farmers Market, which will be open in 2010 for the third summer in a row. There has been a growing popularity in farmers markets across the US in recent years, and this has been part of the reason the number of small scale farms has actually increased in 2009. The South Bend Market creates space for people to purchase food from and get to know their farmers. Knowing your farmer is one of the best ways to learn of the full impact of your decisions for the people who produce your food and the land it is produced on.

[This post is the fifth in a series that looks at six very different efforts to build a more sustainable food system in the United States. These efforts challenge us to think about food as not just a commodity, but more as a relationship with the Earth.]

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