Economist Brad DeLong on "Three Kansases"

I'm not sure why economist Brad DeLong is writing from Kansas City, but he has posted some comments on the economics and politics of government in Kansas. I would like to say, "Toto, we're not in Kansas anymore - we're in North Carolina," but I'm not so sure.

Here is what he says:

"As best as I can see it, the majority political coalitions in these three different Kansas are as follows:

• In the Petropolis [Wichita area] right now, the majority coalition votes for lower taxes because the petrocrats have convinced the voters (correctly) that state taxes transfer money out of Greater Wichita to the Prairie and to the Blue Triangle [Kansas City area], and (incorrectly) that the citizens of Greater Wichita as a group benefit from more money in the hands of the petrocrats.
• On the Prairie right now, the majority coalition votes for lower taxes because the voters believe (incorrectly) that their state tax money goes to keep the African-American poor of Kansas City in idleness, and (correctly) that their tax money goes to support state colleges, universities, and high schools that teach evolution and "liberalism".
• In the Blue Kansas City Social-Democratic Triangle right now, the majority coalition votes for lower taxes because the voters believe (correctly) that their state tax money goes to support the Prairie, and (correctly) that they could get better value if they kept their state tax money at home, redirected it to lower levels of government to support their schools, roads, and parks, and so had social democracy in seven counties.
• Underpinning everything in all three areas, the majority coalition suffers from Fear of a Black President: Lots of people in Kansas's three regional majority coalitions appear to be thinking: "For 500 years we kept the Black Man down. Now somehow one of them is in charge. What would we do if the Black Man had kept us down for 500 years, and now one of us was in charge? That's right--we would try to disadvantage them, and so he is trying to disadvantage us, and we must oppose everything he wants to do, for if we cannot figure out how it is intended to disadvantage us that only shows that he is clever, and we must oppose everything he plans even more strongly."

I really wish I were joking. But that really appears to be how it is right now--really appears to be What Is the Matter with Kansas"

J. Bradford DeLong on October 01, 2013 at 10:34 AM | Permalink

Economist Mark Thoma On Inequality And The Republican Shutdown Shakedown

In a column in the Fiscal Times, economist Mark Thoma explains the real reason for the current fight over the debt limit. He actually puts it more politely than I do, but the article explains pretty clearly what is at stake.

"We have lost something important as a society," Thoma explains, "as inequality has grown over the last several decades, our sense that we are all in this together. Social insurance is a way of sharing the risks that our economic system imposes upon us. As with other types of insurance, e.g. fire insurance, we all put our money into a common pool and the few of us unlucky enough to experience a “fire” – the loss of a job, health problems that wipe out retirement funds, disability, and so on – use the insurance to avoid financial disaster and rebuild as best we can."

One of the themes that jumps out at me from my reading of actions during World War II: American servicemen completely grasped that we were all in this together - they didn't abandon their fellow soldiers and sailors to the enemy. The order to "abandon ship" didn't mean "abandon your shipmates." It didn't mean "you're on your own." The French say "sauve qui peut," literally "save [oneself] who can" or "every man for himself." That wasn't the way of the American warrior. It is the way these days of wealthy Republicans.
 

"But growing inequality has allowed one strata of society to be largely free of these risks while the other is very much exposed to them." The two strata Thoma is referring to are the 1% at the top of the ladder and the other 99%. "As that has happened," Thoma goes on, "as one group in society has had fewer and fewer worries about paying for college education, has first-rate health insurance, ample funds for retirement, and little or no chance of losing a home and ending up on the street if a job suddenly disappears in a recession, support among the politically powerful elite for the risk sharing that makes social insurance work has declined."

During World War II, even the wealthy dared not violate rationing, even when they could easily afford black market prices. Nor did they dare evade the draft. It wasn't patriotic. 

"Rising inequality and differential exposure to economic risk has caused one group to see themselves as the “makers” in society who provide for the rest and pay most of the bills, and the other group as “takers” who get all the benefits. The upper strata wonders, “Why should we pay for social insurance when we get little or none of the benefits?” and this leads to an attack on these programs."

I didn't miss the Republican message conveyed during last year's election. The theme was "you hard working white folks have to pay taxes to support those lazy, shiftless blacks and hispanics (all illegal immigrants)." Across the nation, African Americans, Hispanics, Asian Americans, Native Americans, Jewish Americans and recent immigrants of all varieties got the same message: The Republican Party has become the party of White Supremacists. Indeed, both supporters and opponents of the GOP understand that "politically conservative" is another way of saying "White Supremacist."

"Even worse, this social stratification leads those at the top to begin imposing a virtue and vice story to justify their desire to stop paying the taxes needed to support social insurance programs. Those at the top did it all by themselves." ( in their own imaginations) "They “built that” through their own effort and sacrifice with no help from anyone else." Balderdash!

The American industrial planner who most clearly articulated the antidote to this nonsense was the late W. Edwards Deming. He understood that success was a result of collective rather than individual effort and particularly opposed bonuses. He described giving a manager a bonus for his organization's quarterly success as akin to rewarding the weatherman for a pleasant sunshiny day.

"Those at the bottom, on the other hand," the comfortably wealthy assert, "are essentially burning down their own houses just to collect the fire insurance, i.e. making poor choices and sponging off of social insurance programs. It’s their behavior that’s the problem," according to the Koch Brothers and their ilk, "and taking away the incentive to live off of the rest of society by constraining their ability to collect social insurance is the only way to ensure they get jobs and provide for themselves." And how did the Koch brothers provide for themselves? The old fashioned way. By choosing wealthy parents.

The people who have made poor choices in recent decades are our political leaders who dismantled very effective protections put in place eighty years ago. We are all suffering as a result.

"Of course, this is a false view of how the system operates," Thoma explains. "The wealthy would not have the opportunity to make so much money if it society didn’t provide the infrastructure, educated workforce, legal protections, and other building blocks critical for their success. And we shouldn’t forget that many of the wealthy got where they are through the privilege and advantage that comes from familial wealth rather than their own merit."

I might add that another way the super wealthy got that way is by buying politicians to change the rules by which we all live. To their advantage, of course. They have rigged the system.

This political dispute over the debt limit is, plainly and simply, about the size and role of government. In particular, it’s an attempt by Republicans to use undue fear about the debt to scale back or eliminate spending on social insurance programs such as Medicare, Social Security, Obamacare, food stamps, and unemployment compensation. And it’s no accident that this attack on social insurance coincides with growing income inequality. - See more at: http://www.thefiscaltimes.com/Columns/2013/09/24/Real-Reason-Fight-over-Debt-Limit#sthash.1PJ2MA0P.dpuf

This political dispute over the debt limit is, plainly and simply, about the size and role of government. In particular, it’s an attempt by Republicans to use undue fear about the debt to scale back or eliminate spending on social insurance programs such as Medicare, Social Security, Obamacare, food stamps, and unemployment compensation. And it’s no accident that this attack on social insurance coincides with growing income inequality. - See more at: http://www.thefiscaltimes.com/Columns/2013/09/24/Real-Reason-Fight-over-Debt-Limit#sthash.1PJ2MA0P.dpuf

the debt is not even an immediate problem. As the latest estimates from the Congressional Budget Office show, we don’t have a debt problem until over a decade from now, and when the debt does finally begin increasing the main cause will be rising costs for health care. So finding a way to rein in health care costs, something that already seems to be happening, is the key to solving our future debt problem. - See more at: http://www.thefiscaltimes.com/Columns/2013/09/24/Real-Reason-Fight-over-Debt-Limit#sthash.1PJ2MA0P.dpuf

the debt is not even an immediate problem. As the latest estimates from the Congressional Budget Office show, we don’t have a debt problem until over a decade from now, and when the debt does finally begin increasing the main cause will be rising costs for health care. So finding a way to rein in health care costs, something that already seems to be happening, is the key to solving our future debt problem. - See more at: http://www.thefiscaltimes.com/Columns/2013/09/24/Real-Reason-Fight-over-Debt-Limit#sthash.1PJ2MA0P.dpuf

In fact, the debt is not even an immediate problem. As the latest estimates from the Congressional Budget Office show, we don’t have a debt problem until over a decade from now, and when the debt does finally begin increasing the main cause will be rising costs for health care. So finding a way to rein in health care costs, something that already seems to be happening, is the key to solving our future debt problem. - See more at: http://www.thefiscaltimes.com/Columns/2013/09/24/Real-Reason-Fight-over-Debt-Limit#sthash.1PJ2MA0P.dpuf

In fact, the debt is not even an immediate problem. As the latest estimates from the Congressional Budget Office show, we don’t have a debt problem until over a decade from now, and when the debt does finally begin increasing the main cause will be rising costs for health care. So finding a way to rein in health care costs, something that already seems to be happening, is the key to solving our future debt problem. - See more at: http://www.thefiscaltimes.com/Columns/2013/09/24/Real-Reason-Fight-over-Debt-Limit#sthash.1PJ2MA0P.dpuf

Unemployment Rate Down - Not Necessarily Good News

I have thought for many years that the "unemployment rate" was not a very useful statistic. It doesn't tell us much about the real world of jobs in this country, and when looked at alone, can convey the absolutely wrong impression.

Dylan Matthews of the Washington Post gives a good explanation why last Friday's employment report, showing reduced unemployment, is not good news. As usual, the devil is in the details.

In a nutshell, the unemployment rate is down because of the large number of jobless people who have given up looking.

Jared Bernstein reports that the reduced unemployment rate is "due to a decline in the share of the population in the labor force, which ticked down two-tenths of a percent, to 63.2%, its lowest level since the summer of 1978, according to MarketWatch.com."

Dylan Matthews' article includes a very  illuminating graph:



As the graph shows, the only age group for which the labor participation rate is up is the age group that should already be retired. But many can't afford to retire, so hold on to their jobs as long as they can.

So much for the golden years.

Jared Bernstein has some more thoughts worth considering. He draws particular attention to the fact that since June of 2009, when the present "recovery" began, there has been a significant decline in public sector employment, unlike the recoveries beginning in 1991 and 2001. Without that loss of jobs in the public sector, our overall unemployment rate would be less than 7%. Still not great by historical standards, but better than now.

Seventy Years Ago: Mussolini Falls

July 28, 1943: Franklin Delano Roosevelt delivers a fireside chat on the fall of Mussolini. And what a chat it was!

No American who heard FDR speak on that day could fail to note that we were all in this together, and we were winning!

Not many leaders have ever had the skill of FDR at putting events into perspective.

Read the whole, inspiring fireside chat here.

And celebrate with a cup of unrationed coffee.

Across The Steppes Of Central Asia

As I read this article, in my mind I heard the strains of Borodin's music.

Would you believe a seven thousand mile journey of freight trains carrying high value cargo from China west across Central Asia through Russia and Poland to Holland? It's happening. The economics of it are fascinating, but also what it tells us about developments in the heart of Asia.

It all began in the late nineteenth century with the Trans Siberian Railway. Propelled by long-forgotten wars.

Now the sinews of commerce are tying the region together in unimaginable ways.

And we knew nothing about it.

Today's New York Times Debate - Is North Carolina A Good Model For State Budgets?

No, it isn't.

Here's the debate.

Later today I'll give my take on the issue. The real question is: "good for whom?"

Fix The Potholes

Trying to explain what government actually does to people who don't believe in government can be very frustrating.

I have explained from time to time that the function of government is to fix potholes. Both figurative and literal potholes.

Anyone who has driven very far on our highways in recent years knows we have a lot of potholes.

Economist Mark Thoma posted an essay today on fixing things. It is worth reading.

In another post, Robert Frank writes from Berlin that "austerity doesn't work if the roof is leaking." Apparently the Germans have figured out they need to fix stuff. And it helps their economy.

Adam Smith And Cooperation Among Humans (And Dogs)

Not long ago, economic historian Brad Delong published some snippets of information for students in one of his courses. One snippet was a quote from Adam Smith about dogs and trading:

"Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog.... When an animal wants to obtain something either of a man or of another animal, it has no other means of persuasion but to gain the favour of those whose service it requires. A puppy fawns upon its dam, and a spaniel endeavours by a thousand attractions to engage the attention of its master who is at dinner, when it wants to be fed by him. Man sometimes uses the same arts with his brethren, and when he has no other means of engaging them to act according to his inclinations, endeavours by every servile and fawning attention to obtain their good will. He has not time, however, to do this upon every occasion. In civilised society he stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons....

"[M]an has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love...."

Jeff Weintraub observes that this passage from Adam Smith is both clever and deceptive. It sets up a false dichotomy and ignores other forms of cooperation among both dogs and man. Weintraub's essay is very much worth reading and can be found
here. Not everything works through the magic of the marketplace.

1776 For Economists - And Historians

1776 was not only the year of America's Declaration of Independence - it was the year Adam Smith published Wealth Of Nations.

As it turns out, Smith had quite a lot to say about colonies and colonizers. Here is a selection of his views. Of particular note is Smith's prediction: "From shopkeepers, tradesmen, and attornies, they are become statesmen and legislators, and are employed in contriving a new form of government for an extensive empire, which, they flatter themselves, will become, and which, indeed, seems very likely to become, one of the greatest and most formidable that ever was in the world."

The Sequester - Destructive And Dumb

Have I mentioned before how destructive and stupid the sequester is?

We are seeing the total failure of government. People are being hurt. The economy is being hurt.

I say again: We don't have a deficit problem - we have a jobs problem! The federal government should spend more money, not less, until employment returns.

Do you want to know just exactly what and who is being harmed by the sequester? Check out Jared Bernstein's blog here.

Tell Me Again About Our Great Recovery

Those who think the economy is taking off should take a look at the following graph from the Federal Reserve:



I think this graph tells us a lot more about the economy than "unemployment" figures. The problem with unemployment figures is the way they are calculated. If you keep looking for work and run out of unemployment benefits, by definition you no longer count as part of the work force. Therefore you are not unemployed.

The employment to population ratio shows how many are employed, an easier and more stable figure. Not much improvement lately.

It didn't have to be this way. We needed to focus on putting people back to work. We have a jobs problem, not a deficit problem.

Have We Been Derped?

Actually, I'm still a bit unsure as to whether Derp is just a noun, or whether it can be a verb as well.

What is a derp? Economist Noah Smith in his blog Noahpinion gives a complete and somewhat humorous explanation here.

It turns out it is connected with epistemology and also with Bayesian analysis. And posteriors.

It explains why some people aren't interested in evidence.

Paul Krugman has a discussion of derpiness here. Even conservative economists use the term.

As for epistemology, epistemic closure (meaning closed minds) can have real world consequences. Here, for example.

This problem has been around for a long time in human affairs. Ecclesiastes had something to say about it:

"...wisdom is better than folly, just as light is better than darkness. The wise have eyes in their heads, while the fool walks in the darkness...." Ecclesiastes 2:13-14.

Sequester: A Destructive Solution To A Non-Problem

Two years ago, the newspapers and TV pundits were warning about a vast "debt crisis."

There never was a debt crisis. There were substantial deficits resulting from the economic collapse from our real estate bubble. Economic collapse and resulting loss of jobs triggered increased expenditures on the social safety net and reduced revenue.

This was not a problem - it is a feature of our economy. It is called "counter-cyclical" expenditure, and is designed to moderate the business cycle and prevent the economy from going into a tailspin. This time, the economic collapse was so severe, it took additional measures to avoid a collapse.

It could have been worse. Much worse.

By now, it could be much better, had we acted on a scale required by the situation. But especially after the 2010 election, the House of Representatives, under Republican leadership, did everything they could to sabotage recovery.

In early 2011, the newly sworn-in Republican House threatened to shut down the government if they didn't get their way.

The result was the sequester bill.

Just as recovery was beginning to happen (though more vigorous recovery efforts would have speeded things up), the sequester is now kicking in. As a nation, we are pressing on the brake while trying to accelerate up the on-ramp of recovery.

Bad idea.

Here's what I had to say about it two years ago.

The underlying problem isn't getting better.

How To Have Economic Prosperity: Advice From Venture Capitalist

Nick Hanauer, wealthy venture capitalist, has been advising the country for the past few years how to become more prosperous: put more money in the hands of consumers. He recently repeated his advice at a Senate hearing. Here is his testimony. It is worth reading the entire presentation.

In some respects, Hanauer's explanation isn't much different from Henry Ford's insight when he paid his factory workers higher than the going wage. If his workers couldn't afford to buy his product, Ford realized, then his own enterprise wouldn't prosper. The super wealthy keep forgetting that insight.

Hanauer gets it right

"When someone like me calls himself a job creator, it sounds like we are describing how the economy works. What we are actually doing is making a claim on status, power and privileges.The extraordinary differential between the 15-20% tax rate on capital gains, dividends, and carried interest for capitalists, and the 39% top marginal rate on work for ordinary Americans is just one of those privileges.
We’ve had it backward for the last 30 years. Rich businesspeople like me don’t create jobs. Rather, jobs are a consequence of an ecosystemic feedback loop animated by middle- class consumers, and when they thrive, businesses grow and hire, and owners profit in a virtuous cycle of increasing returns that benefits everyone."

Man With A Beard And Glasses

Have you heard the one about the stranger who came to the Town of Oriental looking for advice? He was looking for a particular sage experienced in boating. He came to the Bean to inquire of the regulars. "Joe?" The regular asked, just to pin the questioner down. "No problem. He's the old guy with glasses and a beard."

The stranger soon found out the description matches half the male population of Oriental.

Now suppose you are looking for an economist. Here's the account of that search.

WSJ Logic On Bicycles

Yesterday, I expressed puzzlement at the Wall Street Journal's rant about New York City's new program to make it easier for visitors to rent bicycles. "The logic escapes me," I wrote. It seems such a good idea to have more bicycles and fewer automobiles. I have long thought that driving a car to get where you want to go provides only the illusion of freedom, not the real thing.

Travel in Europe, where you can get to where you want to go using high quality, readily available and frequent public transportation, frees commuters and tourists alike from a lot of aggravation. Not to mention expense. It also frees young people not old enough to drive as well as their parents from needing or providing family taxi service. This seems a good thing. Before I was old enough to drive, I was able to get around perfectly well on my bicycle. In those days, the mid to late 40's, my family had only one car.

Paul Krugman has cleared up my confusion. The Wall Street Journal, he explains, isn't defending the rights of those who want to drive themselves from place to place, but to prevent annoyance to those who are routinely driven from place to place. It's a class thing. It's about wealth, power and deference.

Bicyclists don't respect their betters.

Now I understand.

Ben Bernanke's Suggestions

Ben Bernanke, Chairman of the Federal Reserve System and former Princeton professor, spoke at this year's Princeton commencement ceremony. He offered ten suggestions, or perhaps ten observations.

One of his observations was about the practical use of the study of economics. First wryly explaining that economic analysis is superb at explaining to policymakers why the choices they made in the past were wrong, it was not so useful at predicting the future.  "Careful economic analysis," he explained, though,  "does have one important benefit, which is that it can help kill ideas that are completely logically inconsistent or wildly at variance with the data. This insight covers at least 90 percent of proposed economic policies."

Economics blogger Bill McBride commented on Bernanke's comment that it "is at odds with the sequestration budget cuts, "debt ceiling" nonsense, expansionary austerity, and more. I wish data and careful analysis could actually kill bad ideas, but I'm not sure what Paul Ryan would do with his life."

Vacation Comparison

The Organization for Economic Cooperation and Development (OECD) has put together a graph showing how advanced economies compare on paid vacation days.

Here's the graph:



On this Sunday morning, having listened to what Calvin Trillin calls the "Sabbath gasbags," I am reminded of Jesus' words when he was admonished for healing someone on the Sabbath: "The Sabbath is made for man, not man for the Sabbath."

Economists And Politics

Today's New York Times tells the story of the political travails of Russian economist Sergei Guriev. Guriev, a prominent Russian economist who frequently advised former President Medvedev, apparently incited suspicions of Russian authorities when he co-authored a report by experts critical of the prosecution of Russian oil tycoon Mikhail B. Khodorkovsky.

Khodorkovsky, who acquired great oil wealth after the breakup of the Soviet Union, has been imprisoned since 2005 and is being investigated for further charges. Khodorkovsky apparently made the mistake of directly challenging Putin. He has now joined a long line of Russians and Soviet citizens who ran afoul of authorities, back to the time of Ivan Grozny (Ivan the Terrible) and even earlier in Russian history.

In Soviet years, the capture and prosecution of Khodorkovsky would certainly have counted as one of the most significant "show" trials.

Economist Guriev, very well connected in Russian political circles, especially the entourage of Medvedev, may have made an error in judgement by criticizing any aspect of the trial.

The phenomenon of economists getting entangled too closely with politics is not only a problem in Russia. My economics professor in graduate school, George N. Halm, made the error of giving the Nazi regime advice they didn't want to hear right after Hitler came to power. Professor Halm deemed it advisable to flee to the United States, where he became a noted professor of economics.

Guriev has found refuge at the Institut d’Etudes Politiques, a university in Paris. As the French say, "plus ca change, plus c'est le meme chose."

To paraphrase a thought from Tolstoy, "Authoritarian regimes are all alike; each free country is free in its own way."

War With The Newt

Yesterday Paul Krugman (and friends) debated with Newt Gingrich (and friends) in Toronto. In some respects it sounds like a case of "rounding up the usual suspects." Still, I wish I had seen it live.

Here is Krugman's own report of the event, augmented by comments from some who did watch and even some who attended.