Thursday, December 30, 2010

Satisfaction

Keith Richards wrote a book. A month ago, at least, you could find it on the front shelf of the Barnes & Noble, next to the Glenn Beck.
I haven't read the book, but I did read David Remnick's review in The New Yorker. I was struck by this bit:
In the teen-aged imagination, the virtue of being a member of the band is that you end the day in the sack with the partner, or partners, of your choice. Not so, Richards says: "You might be having a swim or screwing the old lady, but somewhere in the back of the mind, you're thinking about this chord sequence or something related to a song. No matter what the hell's going on."
One could preach a whole sermon on that text. To begin with, that's what it is to be an artist, isn't it? It's work, hard work, and you're always working. Or as the man says:
Labour time cannot remain the abstract antithesis to free time in which it appears from the perspective of bourgeois economy. ... Labour becomes the individual's self-realization, [but this] in no way means that it becomes mere fun, mere amusement, as Fourier with grisette-like naivete, conceives it. Really free working, e.g. composing, is at the same time precisely the most damned serious, the most intense exertion.

And there's nothing more satisfying than that exertion. That's what Keith Richards says, anyway. All the varieties of consumption the world can offer -- and it offers them all to the rock star -- can't compete with the need to produce, in this case to produce music. The development of capitalism has certainly increased the number of of people who can get some of the satisfactions of consuming like Keith Richards, but has it increased the number who get the satisfaction of producing like him, freely and creatively?

This need to be doing productive work, and to do one's work well, what Michelet called "the professional conscience" is, it seems to me, one of the most fundamental but one of the most neglected human drives. You can hear it from Richards. You can hear it from people like the stonemason interviewed in Studs Terkel's Working:
There's not a house in this country that I built that I don't look at every time I go by. I can set here now and actually in my mind see so many you wouldn't believe. If there's one stone in there crooked, I know where it's at and I never forget it. Maybe 30 years, I'll know a place where I should have took that stone out and redone it but I didn't. I still notice it. The people who live there might not notice it, but I notice it. I never pass that house that I don't think of it …. My work, I can see what I did the first day I started. All my work is set right out there in the open and I can look at it as I go by. It's something I can see the rest of my life. Forty years ago, the first blocks I ever laid in my life, when I was 17 years old. I never go through Eureka that I don't look thataway. It's always there. Immortality as far as we're concerned
Or you can hear it from the sailor Stanislav in B. Traven's The Death Ship, explaining why he took a grueling, barely-paid job as a stoker on the titular vessel when he was living comfortably as a petty criminal on land:
You get awfully tired and bored of that kind of business. There is something which is not true about the whole thing. And you feel it, see? ... You want to do something. You wish to be useful. I do not mean that silly stuff about man's duty. That's bunk. There is in yourself that which is driving you on to do something worth while. Not all the time hanging on like a bum... It is that you want to create something, to help things going.
This is what liberals, who think that human wellbeing consists in the consumption of goods and services, cannot understand. Capitalism piles up consumer goods but deprives more and more of us of the satisfaction of genuine work. A good trade, when it's a question of meeting basic needs. But once they are met -- and they are met; they are finite, tho liberals, from Mill to DeLong, deny it -- all the bacchanals in the world are no substitute for the knowledge that one has produced something worthwhile by one's own free efforts. Or as that other guy said, It's not that which goes into the mouth, but that which comes out of it, that defiles people. Or that exalts them.


EDIT: Thanks to (I think) Chris Mealy, this has quickly become the most-read ever post on Slackwire. If you like it, you might also appreciate this one and this one.

Thursday, December 23, 2010

2010 Books, Part 2

Michal Kalecki, Theory of Economic Dynamics. Kalecki is important (the hostility classical Marxists in the Shaikh/Dumenil-Levy vein feel toward him is something I'd like to understand better) but except in format this doesn't really count as a book. More like reading a couple articles. So it's only here for completeness.

Peter Laslett, The World We Have Lost. Classic social history of England around the year 1600. Laslett has some odd tics as a writer (like hi one-of-a-kind approach to footnotes) but this is a remarkably rich book given how accessible it is. It really does, I think, give one a sense of how the lived experience of the premodern world was fundamentally different from ours. "Time was when the whole of life went forward in the family, in a circle of loved, familiar faces, known and fondled objects, all to human size. That time has gone forever. It makes us very different from our ancestors."

Cormac McCarthy, The Road. Maybe I read this last fall, I can't remember. What an experience -- for days afterward, I found myself struck by astonishment when I saw that stores were open, houses inhabited, people alive. A.'s husband S., who reads everything, says it's the first book of McCarthy's in over a decade that wasn't worse than the one before. I can't agree -- Cities of the Plain was awful and No Country for Old Men was at least OK. Anyway, you don't need to hear about this book from me. It's on all those "Best of..." lists for a reason.

Lorrie Moore, Self Help. Another story collection whose merits have been obscured for me by Miranda July.

Walter Mosley, Six Easy Pieces. First Moseley I've read. Reckon it won't be the last.

Daniyal Mueenuddin, In Other Rooms Other Wonders
. Stories of feudal Pakistan, beautifully executed. These are lovely stories, Joycean in the best sense, but also the most profoundly conservative of any contemporary fiction I've read. Mueenuddin is a Punjabi landlord scion himself, regardless of his almost supernatural empathy for everyone up and down the feudal hierarchy. It's hard to think of a memorable work of fiction from the 20th or even 19th century that is so attentive to the social order and its hierarchies, and yet takes their permanence and morality so completely for granted. (It's what Tom Wolfe tries, and fails, to do for the US.) "They eat his salt" is a characteristic metaphor for the dependence of retainers on their master; that it might better be turned around never occurs to any of the characters, nor, seemingly, to the author.

Flannery O'Connor, A Good Man Is Hard To Find and Everything That Rises Must Converge. Not sure why this was my year to read Flannery O'Connor. These are fascinating stories. They're a little too rigid and theological -- a little too manipulative of their characters -- to have quite the emotional force, at least for me, of Carson McCullers, who O'Conner can't quite displace from the top of my pantheon of mid-20th century Southern writers. But considered as moral puzzles, they're insidious. Every one is a document of a moral failure and its punishment, and you find yourself turning them over and over in your head as you struggle to understand what kind of justice is involved.

Kim Phillips-Fein, Visible Hands. A history of business conservatism by an old comrade. The chapter on labor and the workplace is really, really good. With the rest, she might have gotten a little too close to her subject -- there's not much in the histories of institutions like Heritage and AEI that, I reckon, their inmates would object to. And it's sorely lacking any situating of the rise of the specifically business-based Right in a larger historical context -- except, oddly, in the bibliographic notes at the end. The narrow focus of the book on the maneuvering of political entrepreneurs leaves one wondering things like, Were business elites right or wrong to feel as threatened by the New Deal as they did? Were there larger structural forces favoring their victory in the 1980s, or did they just play the game better than the liberals? Did the specific political groups she writes about represent business opinion as a whole, or only some segment of it, and in either case, how were they accountable to them? Did the mass base of the conservative movement constrain the peak institutions, or was it all basically top-down? Ah well, maybe in the next book.

George Saunders, Pastoralia. H.'s ex, A., recommended this one. The title story is not bad and the the third one is better than not bad; the rest probably could have stopped at the workshop. In style it's sort of a fusion of Raymond Carver and Garcia Marquez, blue-collar types being emotionally strangled in a sur- or hyper-real world. (Maybe this is a new thing, magical social realism?) I approve the concept but he tries a bit too hard.

W. G. Sebald, Austerlitz. A very strange novel, recommended to me by G. I wonder if some of the things that make it read so strangely, like the lack of paragraphs (or chapters or other breaks) and the indirect dialogue, are more common in German-language fiction? In any case, it's about an older man in England who was evacuated from central Europe as a child and his effort to recover his forgotten childhood and family -- a powerful metaphor for the irrecoverable void in the past of central Europe (or maybe in all of our pasts). The book, especially the opening scenes, is written with jewel-like precision, but I'm not sure how widely I would recommend it -- it's a tour de force that feels almost more like a brilliantly-executed exercise, a demonstration of technique, than a book in its own right.

Jonathan Sperber, The European Revolutions 1848-1851. A general history of 1848. There are probably better ones, but it was useful to me.

Alain Supiot, Homo Juridicus. Maybe the richest and most challenging book I read this year. It's a series of meditations on the relation of law to society, written in that distinctive elliptical French-theorist style. At the broadest level, it's a defense of positive law, against intellectual currents that would reduce law to a special case of economics, or biology, or administration. In this sense he's a liberal, but Supiot (like Carl Schmitt, in his own way) shows how there are elements of the political vision of liberalism that socialism needs to build on and not just transcend. Another book that really needs a post of its own. Meantime, there's a good review in NLR (subscription only, unfortunately).

Peter Temin, Did Monetary Forces Cause the Great Depression? Why is it that in American economics, the only subject where you're allowed to merge history and macroeconomics is the Depression? In any case, for my money, this is how economics should be written. (The answer to the title question, if you're wondering, is No.)

Wells Tower, Everything Ravaged Everything Burned. The second-best short-story collection I read this year. Like Saunders, he's taking the emotional tone of the the Carver-era American story and placing it against a heightened background, in this case not by departing from reality but by seeking out less familiar bits of it. So the guy going through an ugly divorce also collects tropical fish (or has to pick his ex-wife up from a yoga retreat), the man who's left home after a fight with his mother's new husband finds himself in the company of a pedophile at a prize-pig contest at a county fair, the man who can't get past his feud with his brother is also speculating in real estate in Maine. Or, in the title story, the working-class guy just trying to get by happens to work as a Viking raider in medieval Norway. One wants to hate this guy because he's followed the Brooklyn-writer script so exactly -- the MFA, the prizes, the old-money name. But he writes so well!

B. Traven, The Treasure of the Sierra Madre. Just read this one, off of Geert's shelf. Adventure stories in revolutionary Mexico, with an anarchist-socialist edge. And funny, too. Can't argue with that -- I'm starting The Death Ship now.


(Not much economics, huh? Partly, see the tag. But it's also the case that economics mostly doesn't come in book form.)

Wednesday, December 15, 2010

2010 Books, Part 1

Some books I've read in the past year:

Perry Anderson, The New Old World. The guy must be 90 years old, and he is still turning out these huge, deep, beautiful, important books. Someone said that no one writes Latin in English like Anderson does, and while I don't know much about Latin that has the ring of truth: His style can't be described as anything but "classical." The substantive argument here -- if you fish it out from all the clever apercus and brilliant asides -- is that the EU is the European elites' end-run around popular movements, which continue to be stronger there than in the US or in most of the rest of world, but are inherently national.

David Archer, The Long Thaw. Climate change in the long view, not the next hundred years but the next thousand, hundred thousand, million. Yes, we've fucked up the planet that badly.

Alison Bechdel, Fun Home. I read a lot of graphic novels (or comics, whatever) but this is the only one I'm including here. A lovely book. A lot of us grow up in families that look,in retrospect, more or less insane, but few of us are able to describe both the insanity and the way that, from the inside, our families nonetheless worked. And she's an iconic lesbian and all that, but this book would rock regardless.

Jedediah Berry, The Manual of Detection. This is a fun book. I've recommended it to several people and it's been a hit every time. It's a sort of magical-realist satire of the detective novel, bringing out the way that the detective's central mystery is always his own fragmented self ... but who cares what I think. Read it yourself and you'll have your own strong views. It's a book that demands theorizing.

Sean Carroll, From Eternity to Here. Physicist striving to explain the nature of time. Not the worst pop science book I've ever read, and not the best. I have some substantive thoughts about it but they'll wait for another post.

John Cheever, Bullet Park and Falconer. Why did I decide to read Cheever this year? A. lent me Bullet Park; it's a fascinating artifact, a paperback from the early 70s in the small mass-market format, announcing itself a best-seller on the cover; can't imagine a similarly literary novel looking like that today. Cheever! Well, let's say, first, he writes brilliant, perfect scenes but they don't scale; he gets too sucked into crazy monologues and bizarre, over the top set-pieces. (So maybe he's a short-story writer...) And second, that he is the Chinua Achebe of the suburbs, in that his stories combine measurable tragedies governed by the understood rules of the world, with incomprehensible irruptions from outside.

Paul Davidson, John Maynard Keynes. Everybody hates Davidson. Why? I think there's some good stuff in here.

Lydia Davis, Break It Down. A lot to like, probably, but this book was completely eclipsed in my mind by Miranda July.

M. I. Finley, Aspects of Antiquity. Essays on Greece and Rome, good stuff. Finley wrote The Ancient Economy, which gives you a sense of what to expect.

Jerry Fodor and Massimo Piatelli-Palmarini, What Darwin Got Wrong. Critique of Darwinism from the left. Gestures at a lot of important arguments, like the circularity of "fitness", but don't really make them in any systematic way. I wish this had been a better book.

Tom Geoghegan, Were You Born on the Wrong Continent? This was a good book, in its way. Tom -- a friend of mine, once upon a time, tho I haven't talked to him in years -- has a loopy, confessional, faux-naive writing style, all asides and exclamations, that's uniquely seductive, or offputting if you're expecting a conventional argument. Here it's deployed to argue that the European model is better not just for the poor but for the middle class. It's very convincing, for familiar and less familiar reasons -- for him workplace democracy is at the heart of the German model. It's an important argument that more people should hear -- but a hard one to make just as the Euro system is falling apart and his beloved Germans seem to be to blame.

Boris Groys, The Communist Postscript. Bruce Sterling has a short story about a future where poets and artists are the dominant class in society and businessmen and engineers exist in a marginalized demimonde. This strange little book sort of argue that the Soviet Union actually was such a world -- that it genuinely realized socialism in the sense that it was a society governed by language rather than quantities. Even its failure was a success, in this sense, because it ended not due a quasi-natural process of economic breakdown, but by conscious conscious choice.

James Hansen, Storms of My Grandchildren. Did I say we've fucked the planet? No, no, we've really fucked the planet. The section on the Venus Syndrome in this book is the scariest thing I've read this year, and that's including The Road.

Bernd Heinrich, Ravens in Winter. Observational science is awesome.

Miranda July, No One Belongs Here More Than You. Best book I've read all year. If you read fiction at all, you need to read this book. I'd like to write a full post about July. But suffice to say, she somehow manages to discover human situations no one has written about before, or at least to write about them as if no one else has. So reading her stories you feel like you're discovering our emotions, our relationships, for the first time, fresh. The two best stories here -- "Something That Needs Nothing" and "How to Tell Stories to Children" -- are nothing less than miraculous.


Part two is here.

Sunday, December 5, 2010

The Singularity Is Over

So I've thought for a while. I even wrote a post with this title a couple months ago, which I couldn't quite get to congeal. But Cosma Shalizi gets it exactly right:

The Singularity has happened; we call it "the industrial revolution" or "the long nineteenth century". It was over by the close of 1918.

Exponential yet basically unpredictable growth of technology, rendering long-term extrapolation impossible (even when attempted by geniuses)? Check.

Massive, profoundly dis-orienting transformation in the life of humanity, extending to our ecology, mentality and social organization? Check.

Annihilation of the age-old constraints of space and time? Check.

Embrace of the fusion of humanity and machines? Check.

Creation of vast, inhuman distributed systems of information-processing, communication and control, "the coldest of all cold monsters"? Check; we call them "the self-regulating market system" and "modern bureaucracies" (public or private), and they treat men and women, even those whose minds and bodies instantiate them, like straw dogs.

An implacable drive on the part of those networks to expand, to entrain more and more of the world within their own sphere? Check.
"Capital" is more precise than "self-regulating market system," but otherwise I wouldn't change a word.

One should only add that despite the pieties about ever-accelerating change, the past half-century has, by any reasonable metric, seen a slower pace of technological innovation than any prior 50-year period since the end of the 18th century..

Tuesday, November 30, 2010

Something That Doesn't Stop Can Go On Forever

Here's an interesting factoid I came across, while poking around in the trade data (here):

Australia has had a a current account deficit in 48 out of the 50 years since 1960. [1]

These aren't small deficits, either: They average 3 percent of GDP. And yet, where's the pressure to increase net exports? Where's the currency crisis, where's the collapse of the Australian dollar? (In fact, it's at its highest level in more than 30 years, per the BIS.) Where's the unsustainable debt? I know nothing about the Australian economy, but it's hard not to wonder, if a big current account deficit is sustainable for 50 years, why not 100? Why not indefinitely?

It's a question that people who think that current account balance is the master key to the macroeconomy, really ought to think about.

[1] The exceptions are 1972 and 1973.

Saturday, November 27, 2010

Default = Death

I've observed before that to make sense of the financial press, you have to adopt the view that the world exists only as a source of payments on financial assets. Here's a beautiful example, from an article at VoxEU. The writers are discussing CDS spreads on sovereign debt, specifically the "swap curve," which is supposed to represent the market's best guess of the probability of default:
In normal times the slope of the swap curve is flat or slightly positive, reflecting more uncertainty about more distant future . In times of stress, however, the slope typically turns negative, mirroring fears that the country may not survive in the short term. But, if it does, it will not default later on.
Yes, paying bondholders in full is synonymous with national survival.

Which makes sense, I guess, if you're looking at the world only through the bond trader's terminal, where Ireland, say, is not a group of people or a political or historical entity, but simply an asset class. Doug Henwood has a wonderful quote in Wall Street from Charles Leggatt, who liquidated his family's 172-year old art dealership: "What I came into was the art trade; what I am leaving is a financial service." I don't know what's scarier about our rulers: that they are trying to do the same thing to the whole world, or that they think it's already done.

Tuesday, November 23, 2010

Exterminate the Brutes, er, Zombies!

At the bar the other night, they had The Walking Dead on. We do seem to be in a zombie moment right now. One can't but wonder what it means.

I hadn't seen the show before, but I did read the comic books it's based on. (Whatever; I like comics.) The comic version is notable for having the least threatening zombies around; in one scene, a normal guy is trapped overnight in a room with dozens of zombies, and kills them all. With his bare hands. Sure, you don't want them to bite you, but that goes for bedbugs too. (It's also notable for its exceptionally blatant ripoffs of other zombie stories, like the opening lifted straight from 28 Days Later. But maybe that sort of borrowing is the sign of a vital popular form?) More to the point, it, even more than the run of post-apocalypse survival tales, valorizes traditional, masculine authority. Not for nothing it's set in the South, and the main character is a cop; that's a departure from most of these stories, which get their juice precisely from the ordinariness of their protagonists. My friend Ben makes the interesting observation that a very large proportion of horror movies are set in decaying industrial landscapes. But that's not the case with The Walking Dead. There, the spaces the human characters defend against the zombies are iconic enclaves of order: a gated subdivision, a prison. Their central challenge, literal and metaphorical, is to keep the fences in place.

And on the other side of the fences, the zombies. The specific characteristic of the zombie, as opposed to other horror genre monsters, is their lack of individuality. They look human but have no minds, souls or personalities. Their behavior is mechanical, and they only ever appear in groups. The classic vampire story is of the monster stealthily infiltrating our society. You can't tell that story about zombies; they have to be everywhere. Nor can you deter them or manage them, they don't follow the various rules vampires are supposed to. All you can do, is kill them. Indeed, one of the themes of the comic-book Walking Dead is the danger of empathizing with the zombies. In one plot arc, a group of farmers are keeping their zombified relatives and neighbors locked in a barn (again, these are some seriously wimpy zombies) in the hope that they're somehow recoverable. The heroes, naturally, put aside sentimentality and exterminate them. They may look human, is the point, but they're really just part of the formless, threatening mass.

The idea of a small group of civilized people holding some redoubt against a human-looking but impersonal mass is a familiar one in the culture, from Fort Apache to Fort Apache in the Bronx. (My father used to point out that the trope of the small band of white settlers facing a mass of Indians stretching the horizon reversed the historical situation almost exactly.) In this sense zombies slot neatly into some important political myths as well. It's not a coincidence that in Max Brooks' World War Z, the most mainstream recent zombie book, the two countries that are best prepared to deal with the worldwide zombie plague are Israel and South Africa, the latter explicitly thanks to apartheid-era plans for defense of the white minority against the African hordes.

In terms of the logic of zombie stories, Brooks made a good choice. The idea of a small group of fully-human individuals defending themselves against a faceless, anonymous mass has deep roots, but it comes most clearly to the surface in settler societies. Here is Mario Vargas Llosa, for example, on the original confrontation between his Spanish ancestors and the ancestors of the Indian and mestizo poor all around him:

Men like Father Bartolome de Las Casas came to America with the conquistadores and abandoned the ranks in order to collaborate with the vanquished... This self-determination could not have been possible among the Incas or any of the other pre-Hispanic cultures. In these cultures, as in the other great civilizations of history foreign to the West, the individual could not morally question the social organism of which he was a part, because he existed only as an integral atom of that organism and because for him the dictates of the state could not be separated from morality.

It seems to me useless to ask ... whether it would have been better for humanity if the individual had never been born and the tradition of the antlike societies had continued forever.

There's the settler creed, with unusual frankness. We are capable of moral choices; they -- that is, everyone "foreign to the West" -- have no individual existence, but are only parts of a larger organism. We can sympathize with them; they can't even sympathize with themselves. We are human; they are "antlike." Or zombielike.

But why now?

Well, of course the entertainment industry needs new material; vampires are mostly played out and werewolves don't seem to touch any commercially viable anxieties. (Maybe this one will do better.) James Frey is betting on aliens; we'll see.

But there might be a deeper reason. Look at that picture above, of the zombies pressing up against the fence. It doesn't take a degree in semiology to see what that represents. But it's not just the border. My friend Christian, who is finishing a book on the politics of global warming, describes one of the main forms of adaptation in the rich countries as the armed lifeboat. It's adaptation to climate change as exclusion and repression, and that's much easier if you can imagine the excluded as faceless ant people. If we don't find a better way to translate climate change into a political vision that can mobilize people, then the white policeman with the gun, ruthlessly exterminating the masses outside the lager and strictly maintaining order inside it, is an idea we may be increasingly asked to become comfortable with. If so, one could read zombie tales like The Walking Dead as a warning -- or, less charitably, as helping to prepare the way.

Monday, November 15, 2010

Net and Gross, or What We Can and Cannot Learn from Balance Sheets

One of the less acknowledged of the secret sins of economists, it seems to me, is the failure to distinguish between net and gross quantities, or to treat the net numbers if they were all that mattered.

Case in point, the issue of deleveraging, where the good guys -- the anti-austerians -- are trying to get an accounting-identity argument to do more work than it it's capable of.

A good example is this post from Peter Dorman (which Krugman liked), which points out that in a closed economy one agent's debt is always another agent's asset, and total consumption must equal total income. So the only way that one agent can reduce its net liabilities is for another's to increase, just as the only way some agents can spend less than their income is for others to spend more. In this sense increased public debt is just the flipside of private-sector deleveraging; arguments that the public sector should reduce its debt along with the private sector are incoherent. QED, right?

Except, this argument proves too much. It's true that one agent's net financial position can't improve unless another's gets worse. But the same accounting logic also means that financial claims across the whole economy always sum to zero. Total net worth is always equal to the sum of tangible assets, no matter what happens on the financial side. [1] So it's not clear what leveraging and develeraging could even mean in these terms. So, since the words evidently do mean something, it seems they're not being used in those terms.

It seems to me that when people talk about (de)leveraging, they are almost always talking about gross financial claims, not net, relative to income. A unit that adds $1,000 in debt and acquires a financial asset valued at $1,000 is more leveraged than it was before. And in this gross sense, it is perfectly possible for the public and private sector to simultaneously deleverage.

Consider the following very simple economy, with just two agents:


T1




Income Assets Liabilities Net Worth
A 1 4 3 1
B 1 5 2 3
Total 2 9 5 4





T2




Income Assets Liabilities Net Worth
A 1 3 2 1
B 1 4 1 3
Total 2 7 3 4

The transition from T1 to T2 involves simultaneous deleveraging -- in the economically meaningful sense -- by both the agents in the economy, and no national accounting identities are violated.

What would this look like in practice? To some extent, it could simply mean netting out offsetting financial claims, but that only really works within the financial sector; nonfinancial actors don't generally hold financial assets and liabilities at the same time without some good institutional reason. (A firm may both receive and extend trade credit, but those two lines on the balance sheet can't be netted out unless we want to go back to a cash-on-the-barrelhead economy. A typical middle-class household has both retirement savings and a mortgage and student-loan debt; both the borrowing and saving are sufficiently subsidized and tax-favored that it makes sense to add to the IRA rather than paying off the debt. [2]) To the extent that this kind of deleveraging does take place within the nonfinancial sector, it requires that units reduce their gross saving, i.e. their acquisition of financial assets -- a suggestion that will seem even more paradoxical to conventional wisdom than the claim that private-sector deleveraging requires increased public debt. [3] But there's another approach.

Most borrowing by households and nonfinancial firms and households is undertaken to finance the acquisition of a tangible asset -- in the table above, we should really divide the assets column into tangible assets and financial assets. For the low net worth units, most assets are tangible; for middle-class households, the house is by far the biggest asset, while property, plant and equipment is generally the biggest item on the asset side of a nonfinancial firm's balance sheet. So the most natural way for the private sector and the public sector to deleverage is through a transfer of tangible assets from debtor to creditor units, combined with the extinction of the debts associated with the assets. This is, in essence, what privatization of public assets is supposed to do, when the IMF imposes it as part of a structural adjustment program. And more to the point, it's what the foreclosure process, in its herky-jerky way, is doing in the housing market. At the end of the road, there's a lot less mortgage debt -- and a lot more big suburban landlords. [4] And the private sector has reduced its leverage, without any increase in the public sector's.

(Of course, we could just extinguish the debt and skip the asset-transfer part. But that default could be a means of deleveraging is one of those thoughts you're not allowed to have.)

Now, all this said, I completely agree with Dorman's conclusion, that reducing public debt would hinder rather than help deleveraging. (Or rather, what he thinks is his conclusion; the real logic of his argument is that nothing can help or hinder deleveraging, since -- like motion -- it does not exist.) But the reason has nothing to do with balance sheets. It is because I believe that fiscal consolidation will reduce aggregate income -- the denominator in leverage. I reckon Dorman (and Krugman) would agree. But this an empirical claim, not one that can be deduced from national accounting identities.


[1] Or the sum of tangible assets and base money, if you don't treat the latter as a liability of the government. This is a question that gets people remarkably worked up, but it's not important to this argument. (Or to any other, as far as I can tell.)

[2] Actually I suspect many middle-class households are saving more than is rational -- they're acquiring financial assets when paying down debt would have a higher return. But anyone who knows me knows how comically unsuited I am to have opinions on anyone else's personal finances.

[3] Reducing debt and and expenditure simultaneously doesn't help, since one unit's expenditure is another's income. For financial deleveraging to work, people really do have to save less.

[4] Who might or might not end up being the banks themselves.

Friday, November 12, 2010

Enemies of All Mankind

Is this for real? Did Bruce Sterling really write a novel in which the end of intellectual property rights leads to a complete collapse of social order, with bandits infesting the highways? Yes, it seems, he did.

OK. Take away whatever picture you've got in your mental dictionary under "hegemony," and put this there instead. Because what better ideological scaffolding could any form of privilege ask for, than the idea that society itself would fall apart without it.

Around 1600, most people could not imagine a world without an inborn hierarchy, without gradations of greater and lesser in every area of life. "There is a degree above degree. ... Take but degree away, untune that string, and hark what discord follows." Today they say, take but perpetual copyright away. Not much has changed.

Thursday, November 11, 2010

Why Haven't I Read Anything By Anne Carson Til Now?



Audubon


Audubon perfected a new way of drawing birds that he called his.
On the bottom of each watercolor he put "drawn from nature"
which meant he shot the birds

and took them home to stuff and paint them.
Because he hated the unvarying shapes
of traditional taxidermy

he built flexible armatures of bent wire and wood
on which he arranged bird skin and feathers--
or sometimes

whole eviscerated birds--
in animated poses.
Not only his wiring but his lighting was new.

Audubon colors dive in through your retina
like a searchlight
roving shadowlessly up and down the brain

until you turn away.
And you do turn away.
There is nothing to see.

You can look at these true shapes all day and not see the bird.
Audubon understands light as an absence of darkness,
truth as an absence of unknowing.

It is the opposite of a peaceful day in Hokusai.
Imagine if Hokusai had shot and wired 219 lions
and then forbade his brush to paint shadow.

"We are what we make ourselves," Audubon told his wife
when they were courting.
In the salons of Paris and Edinburgh

where he went to sell his new style
this Haitian-born Frenchman
lit himself

as a noble rustic American
wired in the cloudless poses of the Great Naturalist.
They loved him

for the "frenzy and ecstasy"
of true American facts, especially
in the second (more affordable) octavo edition (Birds of America, 1844).

[From Men in Off Hours.]


(Critics seem to object that Carson's poems read like essays, which are what she used to write. OK. But as an admirer of Brecht and Pound and Larkin, I have to ask: Why shouldn't the essay aspire to the condition of a poem, and vice versa?)

Sunday, November 7, 2010

Karl Marx, Original Real Business Cycle Theorist

From Theories of Surplus Value:
Let us assume that wages and profit fell simultaneously in total value, from whatever cause (for example, because the nation had grown lazier), and at the same time in use value (because labour had become less productive owing to bad harvests, etc.), in a word, that the part of the product whose value is equal to the revenue declines, because less new labour has been added in the past year and because the labour added has been less productive...
Prescott, Barro, Sargent, Lucas, etc. owe this guy royalties! or at least a footnote.

Saturday, November 6, 2010

No More ZLB

Can we please stop talking about the zero lower bound?

Krugman today insists that we do, in fact, face a problem of inadequate demand. And he's right! But he glosses this as an "excess supply of savings even at a zero interest rate," which isn't right at all.

Let's be clear: There is not "an" interest rate, certainly not a zero one. There are various interest rates, and the ones that are relevant to saving and investment remain high. The BAA corporate bond rate (the red line in the figure below) is currently at 5.7 percent -- pretty much exactly where it was in the first half of 2005. And given that inflation is substantially lower than it was five years ago, that particular real interest rate is not only not zero, it's gone up.


The real question is, can reducing the federal funds rate reduce the economically important interest rates? Now, obviously the answer is No if the fed funds rate (the blue line in the graph) is as low as it can go; in this sense the ZLB is real. But the answer can also be No when the fed funds rate is well above zero, if there's no reliable link between the overnight Treasury rate and the rates businesses borrow at; and that seems to have been the case since sometime in the '90s. As the figure shows, the Fed's recent rate reductions didn't reduce bond rates at all, even before the Fed Funds rate hit zero; and all the hikes earlier in the decade didn't raise bond rates either. You'd see a similar picture if you looked at any other economically relevant interest rate. In general, as my friend Hasan Comert shows in his just-defended dissertation, the Fed lost control of the important interest rates some time ago. So the best thing you can say for the zero lower bound, is that arriving there has dramatized a truth that should have been evident for some time already.
As usual, Keynes got it right: "The acuteness and the peculiarity of our contemporary problem arises out of the possibility that the average rate of interest which will allow a reasonable average level of employment is one so unacceptable to wealth-owners that it cannot be readily established merely by manipulating the quantity of money. ... The most stable, and the least easily shifted, element in our contemporary economy has been hitherto, and may prove to be in future, the minimum rate of interest acceptable to the generality of wealth-owners." The failure of interest rates to move to a level compatible with full employment is not a technical problem, but a structural one.

Tuesday, November 2, 2010

The Lucas Critique: A Critique

Old-fashioned economic models (multiplier-accelerator models of the business cycle, for example) operate in historical time: outcomes in one period determine decisions in the next period. That is, agents are backward-looking. The Lucas critique is that this assumes that people cannot predict what will happen in the future. The analyst on the other hand can derive later outcomes from earlier ones (or we would not be able to tell a causal story), so why can't the agents in the model?

Lucas says this is an unacceptable contradiction, and resolves it by attributing to the agents the model used by the analyst. (Interestingly some Post Keynesians (e.g. Shackle) seem to see the same contradiction but they resolve it the other way, and take the inability to predict the future attributed to the agents in the model as a fundamental feature of the universe, so applicable to the analyst too.) But is the idea of predictable but unpredicted outcomes such an unacceptable contradiction?


One reason to say no is that the idea that agents must know as much as analyst rests on a sociological foundation – that institutions are such as to foster knowledge of the best estimate of future outcomes. This need not be the case. For example, consider the owners of an asset that has recently appreciated in value, where there is some doubt about whether the appreciation is transitory or permanent, or whether further appreciation should be expected. Those asset-owners who have a convincing story of why further appreciation is likely will be most successful at selling at a higher price, and so will increase their weight in the market. And to have a convincing story you should yourself be convinced by it – this is true both logically and psychologically. Similarly with various arm's-length relationships that must be periodically renewed – the most accurate promises are not necessarily the most likely to bring success. Or on the other side, classes and organizations to maintain their coherence need their members to hold certain beliefs. This could take the deep form of ideology of various kinds, or the simple form of the practical requirements of organizational decision-making implying a limited set of inputs.

The other reason comes if you carry the Lucas critique through to its logical conclusion. Those who accept rational expectations also use the method of comparative statics, where transitions from one equilibrium to another is the result of “shocks”. One set of technologies, tastes, endowments, policies, etc. yields equilibrium A. Then a shock changes those parameters, and now there's equilibrium B. Joan Robinson objected to this procedure on grounds that it ignored dynamics of transition from A to B, but there is another problem. Evidently B is a possible future of A. The analyst knows this. So why don't the inhabitants of A? Unless the shock is literally divine intervention, presumably its probability can be affected by the their actions, so doesn't the analysis of A have to take that into account? Or, even if the shock is indeed an act of God, it's possibility must be known – since it is known to the analyst – and so it must affect decisions made in A. But in that case the effects of the shock can be hedged and nothing happens as a result of the shock; there is no longer two equilibria, just one. So we either have agents with perfect knowledge of everything and no knowledge of shocks, which must literally be divine interventions; or we can have only a single equilibrium which nothing can change; or we can become nihilists like Shackle; or we can reject the Lucas critique and accept that there are regularities in economic behavior that are not anticipated by the actors involved.

Monday, November 1, 2010

Fragment of an Argument

David Colender, in Beyond Microfoundations: Post Walrasian Macroeconomics, explains that Post Walrasian macro is based on the idea that complexity of macro economy and limits to individual rationality mean that there will not be a unique equilibrium. Institutions and non-price coordinating mechanisms are needed to constrain the available degrees of freedom, to produce stability. But "while many past critics of Walrasian economics have based their criticism on the excessive mathematical nature of Walrasian models, I want to be clear that this is not the Post Walrasian criticism; if anything, the post Walrasian criticism is that the mathematics used in Walrasian models is too simple. ... The reason Marshall stuck with partial equilibrium was not that he did not understand the interrelationships among markets.... Instead Marshall felt that general equilibrium issues should be dealt with informally until the math appropriate for them was developed. That has only recently happened."

I heard something very similar from Duncan Foley last week: Heterodox macro needs to be more mathematically sophisticated than the mainstream, with nonlinear regressions and models using statistical mechanics drawn from physics.


Sorry, I'm not buying it. Colender and Foley are right that it's not possible to construct a consistent, tractable, intuitive model of the economy using linear equations. But the solution is not to construct intractable, non-intuitive models using more complex math. It's to abandon the search for a general model and focus instead on locally stable aggregate relationships that allow us to tell causally meaningful stories about particular developments. We don't need a theory of institutions in the abstract, but historically grounded accounts of specific institutions.

Is There Really a European Sovereign Debt Crisis?

The past few months have seen a flurry of articles warning that the next stage of the financial crisis will be a flight from sovereign debt, specifically in the European periphery. Even people who don't believe in confidence fairies when it comes to the US or the UK accept the conventional wisdom that financing the deficit of the PIIGS countries (Portugal, Ireland, Italy, Greece and Spain) is a problem -- that there is simply no way to convince the public to hold the amount of debt these countries will have to issue in the absence of austerity. For these countries, it's sadly conceded, in the absence of the option of devaluation the hard exigencies of the bond market leaves them no choice but slash spending and force down wages.

But is it true? Here are the relevant debts and deficits, in billions of euros (not percent of GDP, for reasons that will be clear in a moment.)


General Government Debt and Net Borrowing



2010 2009 2008
Greece Net debt 259 230 199

Net borrowing 19 32 18
Ireland Net debt 86 58 41

Net borrowing 28 23 13
Italy Net debt 1542 1473 1395

Net borrowing 80 80 42
Portugal Net debt 135 121 105

Net borrowing 12 16 5
Spain Net debt 1051 1054 1088

Net borrowing 97 118 44
PIIGS Net debt 3073 2936 2828

Net borrowing 236 269 122

Source: IMF, World Economic Outlook

(General government here includes all levels of government; "net" means that intra-government borrowing is excluded.)

As we can see, deficits approximately doubled in the PIIGS countries between 2008 and 2009, and stabilized in 2010. But how big are these deficits? Are they, for example, big compared with the balance sheet of the European Central Bank?


ECB Assets (billions of euros)



4th week of October of...


2010

2009

2008

2007

2006

2005

Euro-area bank loans

547

701

831

451

444

389

Euro-area securities

471

361

153

133

121

133

Total assets

1878

1786

1958

1249

1119

999

Source: ECB, Weekly Financial Statements

In passing, it's interesting how different the balance sheet of the ECB looks from the Fed's especially before the crisis. While the asset side of the Fed's balance sheet, at least until three years ago, consists almost entirely of treasury bills, the ECB has more lending to banks, much more foreign exchange reserves, much more gold (about 10 percent of its pre-crisis assets!) and relatively little in the way of securities. For present purposes, though, two points stand out. First, the ECB increased its security holdings by E320 billion over the past two years, or E160 billion a year. This is equal to two-thirds of the total annual borrowing of the PIIGS countries. So in principle the ECB would only have to increase its current rate of securities purchases by 50 percent to meet the entire borrowing needs of the five threatened countries. Second, looking now at stocks rather than flows, the ECB increased its balance sheet about about 1 trillion euros between 2005 and 2008. Another similar increase would allow the ECB to purchase one-third of the entire outstanding debt of the PIIGS countries. Interestingly, this is very similar to the increase in the Fed's balance sheet over the same period. More to the point, it's well within the range that has been suggested as an appropriate size for a second round of quantitative easing (QE2).

Now, I'm not suggesting that the ECB should actually finance all new borrowing by ECB countries facing crises, or try to monetize a substantial portion of their existing debt. For one thing, there's no need to; presumably even modest additional purchases would be enough to convince private actors to hold the debt at a reasonable price, if the ECB made it clear it stood ready to do more. I'm just saying that the frequently-heard argument that the governments of Southern Europe are "too big to save" isn't obviously true. It seems more likely that any European QE2 -- quantitative easing in its current use, remember, just means big central bank purchases of long-dated government debt -- that had appreciable macroeconomic effects would be more than enough to solve the sovereign debt problem as well.

Of course people (or their equivalents in the world of respectable business opinion) get very upset when you suggest that a government debt problem can be solved by just monetizing it. Oh, they say, but that's inflationary. Maybe; but in the current context that's an argument for it, rather than against it. And given that the 2005-2008 expansion of the ECB balance sheet didn't produce any noticeable upward pressure on prices, it;s hard to see why another comparable one would. OK, they say, but what about the incentives? Why should governments ever show fiscal discipline if they know the ECB will just bail them out when they get in trouble? And there's the heart of the matter, I think. It's not that Greece, Spain, and the rest need tough austerity because they can't be bailed out; rather, they won't be bailed out in order to force them to implement austerity.

The metaphor you sometimes see for the European sovereign debt situation is of mountain climbers roped together above a cliff. If one falls, it goes, the others can hold him up. But if they don't act quickly and more fall, then the ones still holding on may be pulled down themselves if they don't cut their companions loose. Maybe a more apt analogy would be that the climbers up top have a powerful winch, securely bolted to the rock; they could pull up the danglers just by turning a crank. But they wonder, wouldn't it be better to leave them hanging, to teach them a lesson?



EDIT: The counterargument is that, while there is no technical problem with the ECB guaranteeing the financing of budget gaps in peripheral Europe, this would exacerbate the anti-democratic character of Euorpean institutions by giving the ECB a quasi-fiscal role. This is a trickier question.

Sunday, October 24, 2010

Substitution and Allometry

Brad DeLong channels Milton Friedman:
Supply and demand curves are never horizontal. They are never vertical. If somebody says that quantities change without changing prices, or that prices change without changing quantities, hold tightly onto your wallet--there is something funny going on.
Yes, this is how economists think, or at least think they think. And there's more than a bit of truth in it. Certainly in the case at hand, DeLong-cum-Friedman is right, and Myron Scholes is wrong: It's neither plausible nor properly thinking like an economist to suppose that if unconventional monetary policy can substantially reduce the quantity of risky financial assets held by the public, the price of such assets -- the relevant interest rates -- will remain unchanged.

That's right. But it's not the only way to be right.

Consider the marginal propensity to consume, that workhorse of practical macroeconomic analysis. It's impossible to talk about the effects of changes in government spending or other demand-side shifts without it. What it says is that, in the short run at least there is a regular relationship between the level of income and the proportion of income spent on current consumption, both across households and over time. Now, of course, you can explain this relationship with a story about relative prices driving substitution between consumption now and consumption later, if you want. But this story is just tacked on, you don't need it to observe the empirical relationship and make predictions accordingly. And more restrictive versions of the substitution story, like the permanent income hypothesis, while they do add some positive content, tend not to survive confrontations with the data. The essential point is that whatever one thinks are the underlying social or psychological processes driving consumption decisions (it's unlikely they can be usefully described as maximizing anything) we reliably observe that when income rises, less of it goes to consumption; when it falls, more of it does.

In biology, a regular relationship between the size of an organism and the proportions of its body is called an allometry. A classic example is the skeleton of mammals, which becomes much more robust and massive relative to the size of the body as the body size increases. Economists are fond of importing concepts from harder sciences, so why not this one? After all, consumption is just one of a number of areas where we rely on stable relations between changes in aggregates and relative changes in their components. There's fixed-coefficient production functions (strictly, an isometry rather than allometry, but we can use the term more broadly than biologists do); the stylized fact, important to (inter alia) classical Marxists, that capital-output ratios rise as output grows; or composition effects in trade, which seem to play such a major role in explaining the collapse in trade volumes during the Great Recession.

This is a way of thinking about economic shifts that doesn't require the price-quantity links that Friedman-DeLong think are the mark of honest economics, even if you can come up with some price-signal based microfoundation for any observed allometry. It's more the spirit of the old institutionalists, or traditional development or industrial-organization economics, which tend to take a natural historian's view of the economy. Of course, not every change in proportion can be explained in terms of regular responses to a change in the aggregate they're part of. Plenty of times, we should still think in terms of prices and substitution; the hard question is exactly when. But it would be an easier question to answer, if we were clearer about the alternatives.

Tuesday, October 19, 2010

Does the Level of the Dollar Matter?

Mike Konczal has kindly reposted my back-of-the-envelope estimate of how much a dollar devaluation would boost US demand. (Spoiler: Not much.)

I am far from an expert on international trade and exchange rates. (Or on anything else.) Maybe some real economist will see the post and explain why it's all wrong. But until then, I'm going to continue asking why Krugman and others who claim that exchange rates are an important cause of unemployment in this country, never provide any quantitative analysis to back that opinion up.

More abstractly, one might ask: Is the time it takes for demand to respond to changes in relative prices, minus the time it takes for exchange rate changes to move relative prices, greater than the time it takes for exchange rates changes to move relative costs (or to be reversed)? Just because freshwater economists say No for a bad reason (because relative costs adjust instantly) doesn't mean the answer isn't actually No for a good reason.

Tuesday, October 12, 2010

Abject Patience

Aldous Huxley says, "The abject patience of the oppressed is perhaps the most inexplicable, as it is also the most important, fact in all history."

I thought of that today when I came across this story, which really must be read to be believed. And if you read the fantastic work that Mike Konczal and a few other left bloggers are doing on the foreclosure crisis, it's clear that what happened here is shocking and horrifying but not especially unusual. All over the country, people's homes are quite simply being stolen from them by banks and other creatures from the financial sector.

But the most disturbing part isn't the mortgage servicers evicting people from their homes with no clear title or other legal basis. It is the homeowners themselves. The "good" ones most of all.

Tina Kimmel was told by Citi, her lender, that she qualified for a trial loan modification under HAMP. Then after seven months of paying the lower amount as instructed, she was told without explanation she did not qualify and would be considered in default if she didn't make all the back payments with interest and penalties. She paid them. Then Citi said they wouldn't accept her money, she was being foreclosed. She kept paying. Without informing her they sold her mortgage to Carrington Mortgage Services, which told her that all they knew was she was in foreclosure and it was up to her, not Citi, to give them documentation on anything else regarding her loan. She gave it. And that while they were deciding whether to evict her, she'd have to keep paying. She paid. Next thing she heard was a sheriff's notice on her door, announcing the house would be auctioned in three weeks. At the last minute, she paid the $13,000 -- borrowed from family and friends -- that Carrington was demanding for her nonexistent missed payments, and was allowed to keep her house.

She did everything the banks told her to. She's proud of that. Shouldn't she be ashamed?

I don't know that much about mortgages or mortgage fraud. But one thing I do know is that the Citis and the Carringtons will keep stealing houses as long as the victims think it's their duty to do whatever it takes to satisfy them, and to peacefully move out if they fail.

One can't help wondering how many houses would have to end up mysteriously burned a few days after an eviction, to make the banks find loan modifications suddenly quite attractive. But instead we get Tina Kimmel, stakhanovite bill-payer.

Wednesday, October 6, 2010

From Obscure Blog to Slightly Less Obscure Blog

A revised version of my stuff on the dollar and trade is now up at the Roosevelt Institute's blog, New Deal 2.0.

People are liable to actually read it now. Let's hope I didn't get anything too egregiously wrong.

Tuesday, October 5, 2010

A Bit More on China

Mike Konczal points me to this interesting piece by Walker Frost in The American Scene, on the Chinese currency peg. I asked earlier how much Chinese appreciation would boost US demand (more on that below). But there's a prior question, which is whether an end to Chinese currency intervention would lead to appreciation at all. As Frost points out, the dollar purchases by the central bank coexist with restrictions on private investment abroad and strong incentives for FDI by foreign firms. These policies increase net capital inflows and therefore tend to raise the value of the Chinese currency; the Chinese central bank then pushes it back down with its dollar purchases. It's far from clear which of these effects is stronger, and therefore, whether an across-the-board liberalization would lead the Chinese currency to rise against the dollar, or to fall. In short, we should see Chinese currency interventions not as part of an export-led growth strategy that requires a current-account surplus, but as part of an investment-led growth strategy that would otherwise tend to produce a current-account deficit. [1]

This is a point Anwar Shaikh has also made, when I've discussed this stuff with him. Don't talk about undervaluation, he says, that implies some known free-market equilibrium exchange rate, and there isn't one; talk about stabilization instead.

Another interesting discussion of the Chinese currency peg is in this Deutsche Bank report, which tends to confirm my skepticism about the effect of currency adjustment on US-China trade flows. They note that "RMB appreciation tends to ... reduce nominal wages in the export sector," confirming my sense that exchange rate changes don't reliably move relative costs. And they use an estimate of -0.6 for exchange rate elasticity of Chinese exports. I don't want to put too much weight on this number -- I'm not sure how it's derived -- and they don't give any estiamtes for US-China flows specifically; but given the well-established empirical fact that exchange-rate elasticity is unsually low for US imports, we have to conclude that the number for Chinese exports to the US is substantially lower. So if you believe the Deutsche Bank number for Chinese exports as a whole, my estimate of -0.17 for Chinese exports to the US is probably in the right ballpark. Which, again, means that even a very large Chinese appreciation would have only a trivial impact on US aggregate demand.


[1] The same goes for tariffs and other trade restrictions imposed by Latin American countries as part of import-substitution industrialization.

Saturday, October 2, 2010

... and How About a Higher Yuan?

Another day, another Paul Krugman post blaming China for US unemployment. And maybe he's right. But it would be nice to see some numbers.

On the same lines as my earlier post about the effect of dollar devaluation on aggregate demand, we can make a rough estimate of trade elasticities to calculate the effect of a Chinese revaluation.

Unfortunately, there aren't many recent estimates of bilateral trade elasticities between the US and China. But common sense can get us quite a ways here. In recent years, US imports from China have run around 2 percent of GDP, and US exports to China a bit under 0.5 percent. So even if we assume that (1) a change in the nominal exchange rate is reflected one for one in the real exchange rate, i.e. that it doesn't affect Chinese prices or wages at all; (2) a change in the real exchange rate is passed one for one into prices of Chinese imports in the US; (3) Chinese goods compete only with American-made goods, and not with those of other exporters; and (4) the price elasticity of US imports from China is a very high 4.0; then a 20 percent appreciation of the Chinese currency still boosts US demand by less than 1 percent of GDP.

And of course, those are all wildly optimistic assumptions. My own simple error-correction model, using 1993-2010 data on US imports from China and the relative CPI-deflated bilateral exchange rate, gives an import elasticity of just 0.17. [1] If the real figure is in that range, then a Chinese appreciation of 20 percent will reduce our imports from China by just 0.03 percent of GDP -- and of course much of even that tiny demand shift will be to goods from other low-wage exporters.

I don't claim my estimate is correct. But is it too much to ask that Krugman tell us what estimates he is using, that have convinced him that the best way to help US workers is to foment a trade war with China?


[1] This is a real exchange-rate elasticity, not a price elasticity, so it accounts for incomplete passthrough and offsetting movements in Chinese real wages. It assumes, however, that changes in the nominal exchange rate don't affect inflation in either country; to that extent, it's more likely an overestimate than an underestimate

Thursday, September 30, 2010

How Much Would a Lower Dollar Boost Demand?

Lots of economists of the liberal Keynesian persuasion (Paul Krugman, Dean Baker, Robert Blecker [1] -- very smart guys all) think dollar devaluation is an important step in getting back toward full employment in the US. But have any of them backed this up with a quantitative analysis of how much a lower dollar would raise demand for American goods?

It's not an easy question, of course, but a first cut is not that complicated. There are four variables, two each for imports and exports: How much a given change in the dollar moves prices in the destination country (the passthrough rate), and how much demand for traded goods responds to a change in price (the price elasticity.) [2] We can't observe these relationships directly, of course, so we have to estimate them based on historical data on trade flows and exchange rates. Once we choose values of them, it's straightforward to calculate the effect of a given exchange rate change. And the short answer to this post's title is, Not much.

For passthrough, estimates are quite consistent that dollar changes are passed through more or less one for one to US export prices, but considerably less to US import prices. (In other words, US exporters set prices based solely on domestic costs, but exporters to the US "price to market".) The OECD macro model uses a value of 0.33 for import passthrough at a two-year horizon; a simple OLS regression of changes in import prices on the trade-weighted exchange rate yields basically the same value. Estimates of import price elasticity are almost always less than unity. Here are a few: Kwack et al., 0.93; Crane, Crowley and Quayyum, 0.47 to 0.63; Mann and Plück, 0.28; Marquez, 0.63 to 0.92. [3] (Studies that use the real exchange rate rather than import prices almost all find import elasticities smaller than 0.25, which also supports a passthrough rate of about one-third.) So a reasonable assumption for import price elasticity would be about 0.75; there is no support for a larger value than 1.0. Estimated export elasticities vary more widely, but most fall between 0.5 and 1.0.

So let's use values near the midpoint of the published estimates. Let's say import passthrough of 0.33, import price elasticity of 0.75, and export passthrough and price elasticity both of 1.0. And let's assume initial trade flows at their average levels of the 2000s -- imports of 15 percent of GDP and exports at 10.5 percent of GDP. Given those assumptions, what happens if the dollar falls by 20 percent? The answer is, US net exports increase by 1.9 percent of GDP.

1.9 percent of GDP might sound like a lot (it's about $300 billion). But keep in mind, these are long-run elasticities -- in general, it takes as much as two years for price movements to have their full effect on trade. And the fall in the dollar also can't happen overnight, at least not without severe disruptions to financial markets. So we are talking about an annual boost to demand of somewhere between 0.5 and 1.0 percent of GDP, for two to three years. And then, of course, the stimulus ends, unless the depreciation continues indefinitely. This is less than half the size of the stimulus passed last January (altho to be fair, increased demand for tradables will certainly have a higher multiplier than the tax cuts that made up a large share of the Obama stimulus.) The employment effect woul probably be of the same magnitude -- a reduction of the unemployment rate by between 0.5 and 1.0 points.

I would argue this is still an overestimate, since it ignores income effects, which are much stronger determinants of trade than exchange rates are -- to the extent the US grows faster and its trading partners grow more slowly as a stronger US current account, that will tend to cancel out the initial improvement. I would also argue that the gain to US employment from this sort of rebalancing would be more than offset by the loss to our trade partners, who are much more likely to face balance of payments constraints on domestic demand.

But those are second-order issues. The real question is, why aren't the economist calling for a lower dollar providing quantitative estimates of its effects, and explicitly stating their assumptions? Because on its face, the data suggests that an overvalued dollar plays only a modest role in US unemployment.



[1] I was going to include Peter Dorman on this list but I see that while he shares the IMO misplaced concern with global imbalances, he says, "Will a coordinated dollar devaluation do the trick? Maybe, if you can get coordination (no easy feat), but it is also possible that US capacity in tradables has deteriorated too far for price adjustment alone to succeed." Which is a more realistic view of the matter than the one Krugman seems to hold. On the other hand, Dorman was also writing just a couple years ago about The Coming Dollar Crash. That dog that didn't bark is something I'll hopefully be writing about in a future post.

[2] Many studies collapse passthrough and price elasticity into a single measure of real exchange rate elasticity. While this is a standard approach -- about half the published papers take it -- I would argue it's not the right one for either analytic or policy purposes. Analytically, the real exchange rate elasticity doesn't distinguish between the behavior of buyers and sellers: A low value could mean either that consumers are not responsive to price, or that sellers are holding price stable in the face of exchange rate changes. And on the other side, it's the nominal, not real, exchange rate that's accessible to policy. Policy-induced movements in the nominal exchange rate only translate into movements in the real rate if we assume that price levels (and real wages, if we're deflating by labor costs) don't respond to movements in the exchange rate, which is not generally a safe assumption.

[3] Price elasticities are all negative of course. I'm omitting the negative sign for simplicity.

Saturday, September 25, 2010

Robert and Frank

Quote of the day: "Robert and Frank were like two peas in a pod -- only they were like the peas in Mendel's genetic crosses , one smooth and one wrinkled." From an LRB review of a new biography of Frank Oppenheimer, brother of Robert, CP member, experimental (rather than theoretical) physicist, and -- I had not known this; I have fond memories of my visit there when I was 12 or 13 -- founder of the Exploratorium.

The reviewer was presumably thinking of Genesis 27 as well as Mendel. Certainly there's something biblical about the Oppenheimer brothers. At Trinity, Robert famously quoted, or anyway later recalled or imagined quoting, the Upanishads: "I am become death, destroyer of worlds." Frank recalled it differently: "I think we just said: 'It worked.'"

Liberal : theoretical : classicist :: communist : experimental : pragmatist. Doesn't one major axis of the 20th century lie right down that line? Frank described his job on the Manhattan Project as "training people to fix what broke, redesigning things when necessary, and ensuring that no one slacked off on the job." Mutatis mutandis, wouldn't most communists have described their work the same?

Friday, September 24, 2010

Disagreement with the World

There's a very fine interview with Argentine historian Adolfo Gilly in the new New Left Review. I especially liked this:

One is led to rebellion by sentiments, not by thoughts. At the end of his statement to the Dewey Commission, Trotsky described being drawn to the workers' quarters in Nikolayev at the age of eighteen by his "faith in reason, in truth, in human solidarity," not by Marxism. But perhaps the most crucial sentiment is that of justice -- the realization that you are not in agreement with this world. There is a story that Ernst Bloch was once asked by his supervisor, Georg Simmel, to provide a one-page summary of his thesis before Simmel would agree to work on it. A week later, Bloch obliged with one sentence: "What exists cannot be true."
Yes. The sense that there is something radically wrong, something intolerable, about the world as it exists, is the deep spring from which the strongest political commitments flow.

(I was also interested by Gilly's claim that in 1960, when he became involved with the Algerian struggle for independence, official Communist parties were hostile because "Moscow characterized the Algerian war of independence as a bourgeois nationalist movement which deserved no backing." It's certainly true that the Soviet Union was very slow to support the Algerians; but Alistair Horne argues, I think plausibly, that this was mainly because they wanted to build on a their good relationship with De Gaulle's France, and also because the French CP, with its strong base among working-class pied noirs, was divided on the war; and not because of any judgment about the character of the Algerian independence movement itself. It's characteristic -- and not unappealing -- that a Trotskyist downplays these practical-political considerations and instead sees a difference of ideology.)

Thursday, September 23, 2010

Wind, Rising

Here's an interesting datapoint: According to the US Energy Information Agency, fully 50 percent of the net new electricity generation capacity added in 2008, was from wind power. (8,300 megawatts of a total of 19,000 megawatts of new capacity; but 2,600 megwatss worth of fossil-fuel capacity was retired.) This is very exciting; it's clear that, despite some truly foolish opposition (what's wrong with those people? wind turbines are beautiful), wind power has reached takeoff as a commercially viable industry.

If we are going to preserve a habitable planet, a big challenge is threading the line between complacency and despair. So it's important to balance the bad news about the scope of the problem, with good news about its solvability.

(If you want to bend the stick back the other way, you could pick up James Hansen's Storms of My Grandchildren and read the chapter on the Venus syndrome. Terrifying.)

Roubini, Deflationist

Last week, Nouriel Roubini wrote a somewhat puzzling op-ed in the Washington Post, in support of a payroll tax cut as a stimulus measure.

It's a rather strange argument, or mix of arguments, since he's never clear whether it's a demand-side or supply-side policy. For example, he argues both that the cut should be higher for low-income workers (since they have a higher propensity to consume), and that "to maximize the incentives for private-sector hiring, there should be sharper reductions to the payroll taxes paid by employers than for those paid by employees."

But let's take the supply-side half of Roubini's argument at face value. Suppose a payroll tax cut lowered the cost of labor to employers. Is it so obvious that would increase employment?

The implicit model Roubini is using is the one every undergraduate learns, of a firm in a perfectly competitive market with increasing marginal costs. But in the real world firms face downward-sloping demand curves, especially in recessions. So the only way a reduction of labor costs can increase hiring is if it allows firms to lower costs, i.e. contributes to deflation. Does Roubini really think that more deflation is what the economy needs? (Does he even realize that's what he's arguing?)

This, anyway, was my reaction when I read the piece. But it wouldn't be worth dragging out a week-old op-ed to take shots at, if my friend Arin hadn't pointed out a recent NY Fed working paper by Gauti Eggerston making exactly this point. From the abstract: "Tax cuts can deepen a recession if the short term nominal interest rate is zero, according to a standard New Keynesian business cycle model. An example of a contractionary tax cut is a reduction in taxes on wages. This tax cut deepens a recession because it increases deflationary pressures." The paper itself involves building up a complicated model from microfoundations (that's why Eggerston gets paid the big bucks) but the underlying intuition is the same: The only way a decrease in labor costs can lead to increased hiring is by lowering prices, and under current conditions lower prices can only mean lower aggregate demand.

As Arin points out, the incoherence of the argument for payroll tax cuts may be precisely their appeal. People who think unemployment is the result of inadequate demand and people who think it's the result of lazy, overpaid workers (i.e. it's "structural") can both support them, even though the arguments are incompatible. (People who don't scruple too much over consistency can even make both arguments at once.) But if macroeconomic policy is limited to stuff that can be supported with bad arguments, we shouldn't be surprised if the results are disappointing. That lower labor costs don't help in a recession is, I guess, another lesson from the Great Depression that will have to be learned again.

As for Roubini, it's hard to improve on Jamie Galbraith's very diplomatic judgment: I cannot discern his methods.

Thursday, September 16, 2010

What Does a Credit Crunch Look Like?


What doesn't it look like? Krugman has a picture:



His point here is right, for sure: Business investment is being held back by weak demand, not lack of credit. Would Tufte approve of that graph, tho? (It looks like one of those images of disk usage you get when you defragment your hard drive.) And more importantly: Why does it start in 1986?

It's an arbitrary date, and an especially weird one to pick in this context, because of what happens if you go back just a couple years. You call that a credit crunch, mate? Now this is a credit crunch:


See that spike over on the left? That's a country full of businessmen screaming as Papa Volcker stomps on their necks. (To be fair, it's their workers he was mainly interested in strangling, but the credit squeeze for business was no less real for that.) And that's what a credit crunch looks like.