Economists

"An economist's guess is liable to be as good as anybody else's. "

Will Rogers

I think Will was too kind to the economists of his day. As of his death in 1936, none of the neoclassical economists had figured out how it came about that the economy had stabilized at a low utilization of economic resources. It took John Maynard Keynes to figure that out, and his General Theory wasn't published until after Rogers' fatal airplane crash at Point Barrow.

Here is what Keynes had to say about economists:

"But apart from this contemporary mood, the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil."

I'm not convinced that even Keynes got this right. The power of vested interests, when coupled with the writings of defunct economists, amplified by "voices in the air" heard only by madmen in authority, can be very powerful, indeed. Present concerns about the nonexistent "debt crisis" and the imagined specter of "inflation" and "bond ratings" are examples. It's like relying on Elwood P. Dowd's conversations with Harvey for economic advice.

Even in Keynes' day, the intellectual influence of defunct neoclassical economists on policy led the Roosevelt administration to prematurely attempt to balance the budget in 1937, setting off a second dip of the Great Depression.

I was there.

It took five more years and immense war spending to dig out of that hole. Let's not go there again.

On Cooperation

"Competition leads to loss. People pulling in opposite directions on a rope only exhaust themselves: they go nowhere. What we need is cooperation. Every example of cooperation is one of benefit and gains to them that cooperate. Cooperation is especially productive in a system well managed. It is easy to make a list of examples of cooperation, some of which are so natural that we may not have recognized them as cooperation. Everybody wins."

W. Edwards Deming

Don't Eat Our Seed Corn

Folks who didn't grow up on a farm may not get the allusion to seed corn. Let me explain.

Back in the olden days (before hybrid seeds and genetic engineering), farmers harvested their crops and set aside some of the harvest to use as seeds for the following year's planting. Even in hard times, they would never eat the grain set aside as seed. If they ate the seed corn, it would extend and intensify the famine into the next year.

Something like that is going on in Raleigh this year as the state legislature is pushing drastic cuts in education programs, layoffs of teachers and diversion of public school resources to charter schools and even private schools. That may even be worse than eating seed corn, because the effects may last for a lifetime of the students affected.

"Why should I care?" you may ask, "I have no children in school."

Such an attitude would be foolish in the extreme. All children in school are our children. They are the ones whose contributions to Social Security taxes and Medicare funds will be used to support us in our old age. Even for those who don't need Social Security to survive, retirement plans depend on future productivity increasing the value of factories and enterprises and expanding our national wealth and the value of our stocks and bonds. Who will labor to cause that increase?

These very schoolchildren.

One of the most pernicious ideas abroad in the land is that children and their parents are "customers" of our schools and that the school systems must compete for their favor. The truth is that we are all recipients of the value provided by effective school systems.

Good schools attract intelligent and capable parents to come here. They attract businesses to our state. Schools are a valuable economic multiplier. We let them languish at our collective peril.

Let's make our schools even better, instead of starving them for resources.

Protect Polluters

Monday night's County Commissioners meeting addressed, among other things, a request by Commissioner Mele for the board to pass resolutions of support for three bills now before the legislature concerning environmental regulations. The bills, attributed to drafting efforts of local real estate mogul Missy Baskerville and introduced by Senator Preston, were as follows:

Senate Bill 323, An act to create an exemption to the riparian buffer requirements for certain private properties in the Neuse River and Tar-Pamlico River Basins.

In brief, the proposed act "grandfathers" any parcel platted and recorded prior to August 1, 2000 from current riparian buffer requirements;

Senate Bill 324, An act to require greater notification of and ability to attend hearings for rule making.

In brief, the act amends present law to require the rule-making agency to notify the governing unit in each county and publish notice in a newspaper in each county that will be impacted by the proposed rule and to schedule public hearings within 60 miles of each county affected by a proposed rule;

Senate Bill 325, An act to provide additional requirements to apply to the adoption and implementation of any proposed administrative rule that is an environmental rule.

The most significant requirement is that at least 80% of any "stakeholder" committee created to consider a proposed rule be made up of persons employed in the private sector, residing in the city or county affected and essentially be in the industry regulated by the rule.

In a nutshell, these three bills are intended to obstruct agencies responsible for developing regulations to implement public law and delay or outright prevent them from doing their job.

Who in all this is going to represent the interest of the public?

A New Town Dock

Last Thursday's agenda meeting of Oriental's Board of Commissioners revealed that Tuesday's meeting will discuss building an additional Town Dock at the end of South Avenue.

This parcel, to which the town won the rights in a case decided by the North Carolina Court of Appeals in 2009, gives the public direct access to the harbor. One appropriate use of the parcel is to build a simple pier extending about 100 feet from shore, for use by transient vessels.

A recurring complaint in some circles is that Oriental isn't sufficiently friendly to business. Otherwise, some contend, we would have more businesses and they wouldn't keep failing.

I wonder how many businesses a population of 875 (latest census) can support. Even the "greater Oriental" population of 2,000 can't support many. We are at the end of the highway.

On the other hand, from 14,000 to 20,000 (estimates vary) boats cruising the East Coast via the ICW each year pass less than two miles away. That represents more than 40,000 potential customers. The best thing we can do for Oriental businesses is to attract more boats to stop here. That would be good for every business.

Last Thursday, one commissioner opposed additional free dockage, on the grounds it may compete with nearby commercial marinas.

This misses the point. Cruising sailors select where to stop based on the reputation a town has as a hospitable place. Availability of transient docks and free anchorage space is among the factors affecting this reputation. The goal is to improve Oriental's brand. The better the brand, the more boats stop. The more boats that stop, the more will come back. Some even stay.
As I contended almost two years ago, the question of what to do about South Avenue is about the future, not the past.

Those of you who support the new town dock project and the effort for Oriental to become even more welcoming and hospitable to cruising sailors, please come to the meeting of the Town Board at 7:00 pm Tuesday, May 3 at Town Hall. And bring other supporters.

The important competition is between Oriental and other towns along the waterway.

On Helmsmanship

The first ship I ever steered was USS Iowa (BB-61) a 45,000 ton behemoth as long as three football fields, propelled by more than 200,000 horsepower.

The boatswain's mate who taught me to steer emphasized that I shouldn't use too much rudder. If I did, I would be constantly chasing the course back and forth across the compass binnacle and never get it right. Even worse, the constant corrections would slow the ship down and waste fuel. If I just used a light touch, natural wave action would usually bring the ship back on course.

As it turns out, the same principal applies to the economy and inflation.

There are two kinds of inflation. There is "headline" inflation, which includes highly volatile prices like food and gasoline. This kind of inflation is notoriously seasonal and subject to temporary influences (bad weather, for example).

The other kind of inflation is referred to by economists as "core" inflation. That is the underlying inflation rather than day to day price fluctuations.

When the Fed manages monetary policy, they have found through experience that they should limit their measures to those affecting core inflation.

Core inflation right now is less than two percent. Furthermore, it is not increasing and there is no sign it will increase anytime soon.

The problem for most of us is that we spend money at the grocery store and gas station in response to "headline" inflation.

Nonetheless, it would be bad for all of us if the Fed started responding to headline inflation with a heavy hand on the helm. That would be another way to kill economic recovery. Goodness knows, the House of Representatives is doing enough on its own to accomplish that. They don't need the Fed's help.

NC Unemployment Benefits

Forbes.com reported on a confrontation today in Raleigh between Republican legislators and workers losing their unemployment benefits.

"The jobless workers." Forbes.com reported, "are caught in a partisan rift over the seemingly straightforward move to change a formula for calculating unemployment benefits, allowing the federally funded program to continue for people out of work for up to 99 weeks."

Some may call it a "partisan rift," but real people are at risk. The dispute, at bottom, is over whose vision for the future of America will prevail. The issues are certainly not trivial.

Americans are increasingly reliant on government programs to meet their most basic requirements. Last year, more than 18 percent of the nation's total personal income came from entitlement programs such as Social Security, Medicare, food stamps, unemployment benefits and other programs, according to an analysis by USA Today. Wages were only about fifty percent of total personal income, the lowest share since government tracking began in 1929.

National Public Radio asked members of the public receiving government benefits to call in with their stories. The transcript of their calls is heart wrenching.

It's the Economy, Stupid!

Eighteen years ago, the Clinton administration focused its efforts intently on improving economic conditions for ordinary Americans. As a result, during President Clinton's two terms from 1993 to 2001, employment in this country increased by 23 million jobs, far surpassing the rate of growth of the population.

During President George W. Bush's first term, there was zero job growth, while the population grew, resulting in a lower percentage of Americans employed than in 2001. By the end of President Bush's second term, the total of job increases during his eight years was 4.8 million. The Bush job increases fell significantly below the increase in population.

As soon as he became president, George W. Bush insisted that tax cuts would lead to more prosperity for Americans.

It didn't work then and it won't work now.

Why do we keep repeating failed experiments?

British Austerity

The Cameron government in the UK is busy testing the hypothesis that the way to economic recovery from a severe recession is to drastically reduce government spending.

How is that working out? Not so well, according to the latest information from the Financial Times. While the government is touting GDP growth in the first quarter of this year, it is only 0.5%. That offsets the previous quarter's decline of 0.5% and shows the British economy essentially treading water.

Britain's opposition finds the performance unimpressive. Mr. Balls, the chancellor of the shadow (opposition) government in waiting, observed that Chancellor Osborne “doesn’t seem to understand that without jobs and growth you can’t get the deficit down. The slower growth, higher unemployment and higher inflation we now see under George Osborne means he is now set to borrow £46bn more than he was planning to. That’s a vicious circle and makes no economic sense at all.”

Regrettably, our own deficit hawks seem bent on leading us down the same path.

By the way, the "austerity will get us out of recession" hypothesis has been tested before. We tested it in 1929. Japan tested it in the 1990's. It doesn't work.

Ford Ascendant

Ford Motor Company today reported its first quarter net income was $2.6 billion, or 61 cents per share, a $466 million increase from first quarter 2010. Pre-tax operating profit was $2.8 billion, or 62 cents per share, an increase of $827 million from first quarter 2010. Ford also reported it had posted a pre-tax operating profit for seven consecutive quarters.

This is not just good news for Ford. It is good news for a particularly effective style of management, advocated by one of America's great innovators.

After a bad experience with an automobile built by one of Ford's domestic competitors, I read that Ford had hired W. Edwards Deming as a consultant on quality. Not long afterward, I bought a 1987 Taurus and have purchased Ford products ever since.

It wasn't that I thought Deming could magically and immediately bring Ford up to the quality of the Japanese auto makers to whom he gave advice not long after WWII. It was rather that I thought his hiring told me that Ford was now taking quality seriously. That meant a lot.

It turns out, Deming paid no attention to the details of Ford's quality control procedures. He examined Ford's management. It is management, he insisted, that is responsible for 85 percent of a company's problems with quality.

Problems don't lie to any significant degree with the workers, and cannot be corrected by the workers. Slogans and exhortations don't work, he insisted. Instead, he concentrated on changing the culture of management.

Good for Ford.

I'll have more to say later about some of Deming's ideas and how they might help address some of our problems in government and politics.

US Behind in Percentage of Small Business-Who Knew?

Everyone seems to agree that the US is a beacon to the rest of the world when it comes to encouraging small business. Everybody seems to be wrong.

A report from the Center for Economic and Policy Research comparing major industrial countries shows we are way behind.

Why are there so many more small businesses in other countries?

The center speculates that the reason is that the other countries all have some form of universal health care, which removes an important economic obstacle to businesses.

US Pays Low Taxes

The idea constantly hammered into our heads by Republicans is that we pay high taxes, which must be reduced. Not so.

In fact, of all the advanced western-style market economies and democracies (what we used to call the free world), only Australia has lower taxes than the United States.

The Center on Budget and Policy Priorities has published this helpful series of charts showing how we compare.

Darwin and the Anarchist Prince

About five years after Charles Darwin published his book On the Origin of Species, a young Russian army officer, Prince Peter Kropotkin, became involved in geographic and biological research in Siberia and Manchuria.

Kropotkin resigned from the Army in 1867, continuing to work as a scientist and also as a revolutionary. Even after arrest and incarceration in St. Petersburg's Peter and Paul Fortress, Kropotkin continued writing important scientific papers.

Later exiled in Western Europe, Kropotkin became prominent as an anarchist, though not of the bomb-throwing kind.

In addition to his activities in anarchist circles, Kropotkin continued writing on scientific subjects.

In 1902, Kropotkin published the book, Mutual Aid: a Factor in Evolution, based on his scientific research of four decades earlier. The conclusion of his book took direct aim at Social Darwinism's claims:

"In the animal world we have seen that the vast majority of species live in societies, and that they find in association the best arms for the struggle for life: understood, of course, in its wide Darwinian sense – not as a struggle for the sheer means of existence, but as a struggle against all natural conditions unfavourable to the species. The animal species, in which individual struggle has been reduced to its narrowest limits, and the practice of mutual aid has attained the greatest development, are invariably the most numerous, the most prosperous, and the most open to further progress. The mutual protection which is obtained in this case, the possibility of attaining old age and of accumulating experience, the higher intellectual development, and the further growth of sociable habits, secure the maintenance of the species, its extension, and its further progressive evolution. The unsociable species, on the contrary, are doomed to decay."
– Peter Kropotkin, Mutual Aid: A Factor of Evolution (1902), Conclusion


In other words, Kropotkin suggests that altruism, so denigrated by Ayn Rand and her followers, plays an important role in the success of the human species.

Interestingly, recent scientific research lends weight to Kropotkin's views. A recent book, Supercooperators: Altruism, Evolution and Why We Need Each Other To Succeed , by Martin A. Nowak, examines the issues. Here is an interesting review of the book.

Even conservative New York Times columnist David Brooks has reported in a recent column about research substantiating the importance of collective achievement as opposed to individual efforts.

Altruism and Politics

"Altruism ( /ˈæltruːɪzəm/) is selfless concern for the welfare of others. It is a traditional virtue in many cultures, and a core aspect of various religious traditions, though the concept of 'others' toward whom concern should be directed can vary among religions. Altruism is the opposite of selfishness." - Wikipedia

Altruism is central to the teachings of Jesus as recorded in the synoptic gospels (Matthew, Mark, Luke and John) and central to early Christian practices as recorded in the Acts of the Apostles and the epistles of Paul. Altruism is also central to Judaism.

The wealthy and powerful have never believed in altruism. Historically, they claimed immunity due to some variation of divine will. But usually the wealthy and powerful have been big on altruism by ordinary people.

Then along came science.

In the second half of the nineteenth and the early twentieth centuries, the wealthy welcomed Darwin's theory of natural selection as expounded by certain popularizers ("survival of the fittest"). Social Darwinism was seen as providing scientific justification for why it was meet and proper for wealthy "robber barons" to have accumulated so much wealth. The 1929 crash of Wall Street rather tarnished this claim.

Ayn Rand to the rescue.

Rand (born Alisa Zinov'yevna Rosenbaum in Russia in 1905), was an atheist novelist, playwright and philosopher who immigrated to the United States in 1926. A 1924 graduate of Petrograd State University in Petrograd, Russia (later Leningrad and now St. Petersburg), she developed a following in this country for her ideas, expressed in two novels and a series of "philosophical" writings.

In short, Rand's philosophy inveighed against altruism and in favor of "rational egoism," i.e. selfishness. She has many followers, prominently including Congressman Ron Paul, Senator Rand Paul, former chairman of the Fed Alan Greenspan, and more recently most adherents of the Libertarian Party and the Tea Party movement. Her particular talent was in "her ability to turn upside down traditional hierarchies and recast the wealthy, the talented, and the powerful as the oppressed."

The wealthy and powerful responded by adopting her right-wing romantic fantasies as their own, and pursuing them as a political program. Here. in their admiring view, was an intellectual underpinning to replace Darwinism as a justification for their wealth.

No Shutdown, But We Still Have a Problem

The good news is that we apparently won't have a government shutdown (at least as of 10:39 p.m. April 8, 2011).

The bad news is that the result is a reduction in government spending.

The worse news is that the deal is based on a lie - that the Great Recession and resulting unemployment resulted from budget deficits and national debt. The assurances that reducing spending will bring back prosperity is worse than a lie. It is a destructive lie.

Reduced spending has the potential to bring our very weak recovery to a screeching halt and initiate a new round of economic decline.

I don't like to sound pessimistic. Under normal circumstances, the budget wrangling would be very important, but not dangerous.

After all, the key issue of any political dispute is "who benefits" and "who pays?"

That is the heart of politics. And it affects everyone's welfare.

Where were the deficit hawks when Reagan and Bush I quadrupled the national debt? Where were they when Bill Clinton left behind a budget surplus and a plan to pay off that debt within a decade?

Were they not listening when Dick Cheney asserted that "Reagan proved that deficits don't matter."

Actually, no Democrat believes that deficits don't matter. It is just that there is a time to cut expenditures and a time to spend more.

If we want jobs, now is the time to spend more.

When the economy recovers, we need to reduce both public and private debt.

Euro vs. the Dollar

My graduate professor of international economics, George N. Halm, used to illustrate the phenomenon of runaway inflation (hyperinflation) by telling what life was like when he was a teenager in Germany after World War I.

Professor Halm's mother, a widow, lived on a government pension. Each category of pension was paid on a different day of the week, with widows coming on Friday. By Friday, the value of the pension, which was set on Monday, had dropped out of sight. Even so, he hopped on his bicycle, collected his mother's pension at the pension office and raced around town buying as many household necessities as he could before the value of the money dropped too much farther. The operative principal was to spend the money before it disappeared.

How could shopkeepers know how much to charge? They created an informal price index system. For example, the price of a haircut was indexed to the price of breakfast rolls each morning.

Clearly it was impossible to live that way, and understandably Germans remain paranoid about inflation.

Still, they overdo it. A modest amount of inflation allows price adjustments without triggering deflation. Because of the way the Euro zone was established, the interest rate for the zone is set by the European Central Bank, which is essentially the German Central Bank. They are about to raise the interest rate in the Euro Zone to make sure there is zero inflation in Germany, despite the high probability that this will destroy economic activity in several smaller countries.

It will also place added pressure on the US economy by, among other things, driving up the international price of oil.

Shutdown?

As of today (April 7, 2011), it looks like we are bound to have a government shutdown.

According to the polls, most Americans recognize that it is the Republicans in the House of Representatives, many of whom have never served in public office before at any level of government, who are driving toward this train wreck.

My concern is not just the adverse effect of a shutdown on my personal situation (my US Navy retirement check is likely to be delayed, and possibly my Social Security check), but more importantly the damage it will do to the economy.

In fact, I am disappointed that no one is explaining that any reduction in government spending is likely to bring our weak recovery to a halt and might even start another downward spiral.

The reason is that we are in a liquidity trap. I have explained this phenomenon before.

If I were of a mind to believe in conspiracies rather than mere incompetence, I would suspect the Republicans in Congress intend to wreck the economy and blame the president.

Cheney: "Reagan Proved Deficits Don't Matter"

How soon we forget.

Seven years ago, conservative think tanks and Vice President Cheney were arguing that deficits have no adverse effects on the economy.

Their arguments are summarized here in a 2004 Washington Post article.

What has changed?

For one thing, the real estate bubble collapsed in 2007, nearly bringing the economy to its knees.

For another, we now have a Democrat in the White House for Republicans to blame.

Inherently Safe Nuclear Reactors

A few days ago I mentioned that China is proceeding with an inherently safe nuclear reactor design called the "pebble bed" reactor.

Today's New York Times has an article with details and illustrations of the design here.

But China isn't putting all their energy pebbles in one basket. They are building more conventional reactor designs and moving ahead vigorously with other energy alternatives as well, including wind and solar.

A further benefit of the pebble bed reactor design is that it operates at much higher temperature than the boiling water reactors like the ones in Japan. The higher temperature is not only more efficient for generating electricity, it may also be used to produce vast quantities of hydrogen - sufficient for fueling automobiles. This could free the automobile from dependence on petroleum, while abolishing exhaust pollution. When you burn hydrogen, the only waste product is water.

Critics of each of the above approaches often complain that "[fill in the blank]" isn't the answer. China seems to say, "no problem - we'll just try them all."

Who do you suppose has the best chance of leading the way into the world's energy future?

Radiation is Scary - But It's All Around Us

Like most folks, I've been watching the TV reports of the disaster in Japan. I'm in awe of the courage and persistence of the nuclear plant workers. They didn't give up, despite the hazards, and they seem to be gaining the upper hand. And the populace hasn't panicked.

What about those face masks so many Japanese are wearing? They won't do any good against gamma rays, but they can be very effective against alpha particles. You don't want alpha particles to get inside your body.

Does all this mean we must abandon nuclear power?

No.

How hazardous is nuclear power?

Today's Dot Earth blog on the New York Times site addresses the issue of "Dread to Risk." The article is worth reading. The most interesting link is to a chart comparing radiation dosage in various circumstances. It shows, for example, that eating a single banana exposes one to more radiation than living for a year in the vicinity of a nuclear generation plant. Living near a coal powered generation plant exposes you to three times as much radiation as living near a nuclear plant. Take a look at the table.

The risk is low. But clearly not zero in case of a major disaster such as an earthquake and tsunami.

The present disaster in Japan is a result of the 40-year old design, which requires a very complex cooling system with backups.

What this suggests is that we should investigate other types of nuclear reactors. The most dangerous kind of reactor is the graphite moderated reactor of the Chernobyl variety. Next most dangerous are the boiling water reactors like Three Mile Island and like those used in Japan. A better reactor type is the pressure water reactors like many of our newer reactors.

All of these reactors require intact and functional cooling systems to insure safety.

China is moving ahead with an ambitious plan to mass produce an inherently safe reactor design, known as a pebble bed reactor. There are other candidate designs that will not overheat and explode if cooling fails.

It is past time to invest in safer designs.

One thing to remember: there is no risk-free way of producing and using the large amounts of energy needed for modern civilization.

Each year, about 2500 Americans die in residential fires. Many of these happen in winter and result from use of kerosene heaters.

Let's put our hazards in perspective.