Thursday, February 11, 2016

The Political Economy of Oil (and Other Sectors of a Modern Economy, Considered Separately)

There has been a lot of talk recently about the impact of falling oil prices on global equity and bond markets.  One simple comparison can’t capture all that’s going on, but for starters here’s how the daily price of West Texas Intermediate stacks up with the S&P 500.  I’ve converted both to indexes of their initial values as of July 1, 2015.

Source: FRED

The first thing to notice is that oil prices are far more volatile than this specific equity index, but that’s not very enlightening, since oil is a single commodity while the S&P is a basket of 500 different items.  More interesting is whether they’re aligned in any way.  I don’t think formal tests will help much because equity prices are influenced by many factors that typically emerge and recede in importance over time.  A better way to consider it is to look at different historical episodes and ask whether they are consistent with a compact set of plausible stories.

Obviously there are periods when the two indices move together and periods when they come apart.  It is pertinent that two particular episodes of oil price distress, late August and late January, are associated with sharp equity downturns.  The period from November to January, however, saw oil prices slide while equities held their own.  Perhaps the rate of oil price decline is a factor: it has to be rapid enough to move equities.

Now the reason I mention all this is not because I want to improve anyone’s investment performance, but because it poses what I regard as one of the central questions in political economy, whether the “branches of capital” metaphor has lost most of its salience.  To put it in very simple terms, once upon a time it was common to think of capital as divided between various sectors: there was industrial or manufacturing capital (maybe divided between light and heavy industry or home market and exporters), financial sector capital, real estate capital and so on.  If you were interested in the relationship between capital and political processes, you thought in terms of the agency or structural influence of these various branches on political outcomes.  Whether a government took action that favored or undermined a particular sector depended on the power, potential and actualized, of that sector.  The data that political scientists use to assess the role of wealth (capital) in politics is largely organized on such a sectoral basis.

But what if the sector delineation is less important now than in the past?  For instance, what if the fortunes of non-oil sectors of capital (expected future profits) are tied more closely to the fortunes of the oil producers than in the past?  This would fundamentally alter how we think about the political economy of oil and have large implications for strategies to curtail the use of fossil fuels, for instance.

The short run relationship between oil prices and equities, even if we restrict it to episodes that support the “integration of the branches” hypothesis, is not very revealing.  It could be, for instance, that oil price movements are interpreted as coincident indicators of macroeconomic forces: falling oil prices mean falling incomes and demand in advance of the statistical reports that might validate these trends.  But it could also mean that, in a more financialized economy, there is more cross-dependence of the values of a range of financial instruments on one another: think of the large financial portfolios now held by nonfinancial corporations, greater diversification of portfolios in general, the integration associated with many types of derivatives, and the network effects of increased securitization (use of some financial instruments as collateral for others).

You could approach the same question from the starting point of politics.  When Clinton was elected in 1992 there was a big surge of public interest in and support for health insurance reform.  Remember Harris Wafford?  He was elected in a special senatorial election in Pennsylvania in 1991 in which his advocacy of public health insurance was the overriding issue.  The momentum seemed to be on the side of reform.

The political strategy of reformers was to isolate the health insurance companies.  Yes, they were rich and powerful, but surely their interests were in conflict with nearly every other branch of capital.  After all, most employers were suffering from the high cost of health care provided as a form of compensation to employees; surely they could be enlisted to neutralize or even overwhelm the bleatings of just one sector.  Based on this strategy there was a long period of negotiation over policy details to bring as many other branches of capital on board.  In the end, however, the strategy failed: no amount of policy tinkering could convince the rest of business to oppose the health insurers, and Harry and Louise were left without debating partners.

Nor was the situation very different in 2009 when Obama turned his attention to health care reform: the absence of a public option is directly due to the lack of any financial counterweight to the health insurance sector.  Safeguarding the profits of insurers was the price of getting a bill passed.

And now the issue of the day is climate change, and the sector under direct threat is fossil fuels.  Activists have largely converged on a strategy that is reminiscent of what was tried in health care in the early 90s: isolate the energy companies.  Only a small portion of capital is actually invested in oil, coal and natural gas; make this one sector the target and bring the rest of capital on board.  But this will work only if the branches-of-capital metaphor actually applies, and there is every reason to doubt that it does.  There was no great coalescence (pun intended) of non-carbon capital around climate legislation in 2009, nor should we count on it in the future.  My reading of the recent history of the European Trading System, moreover, is that energy-invested capital has not been isolated there either; this is ultimate reason why carbon prices collapsed into meaningless.

To sum up, the question of the extent to which the interests and power of capital are integrated and can’t be decomposed into particular branches is one of the central uncertainties in political economy, and the answer has great significance for political strategy on the ground.  I think some insight can be gained from more fine-grained analysis of co-movements across financial sectors, particularly in combination with event studies.  Carefully examined case studies might help as well.  At this point, what I most want to say is that there is lots of talk about political economy but hardly any research on the political economic problems that matter most for political action.

How Much Profit Should Vanguard Make on Managing Your Assets?

Justin Fox reports on a weird transfer pricing issue that I have been following:
Near the end of last month, mutual-fund giant Vanguard announced that it had lowered the expense ratios on 35 of its mutual funds. That’s after a December announcement that it had lowered expense ratios on 53 funds. All in all, Vanguard estimated, the changes resulted in an $87.4 million reduction in the fees paid by its customers. Isn’t that outrageous!?!?! I mean, seriously, how shameless can these guys get? That, in short, is the argument Vanguard tax lawyer turned whistle-blower David Danon and his hired expert, University of Michigan law professor Reuven S. Avi-Yonah, are making. Yes, there's a more complicated legal angle involving transfer pricing. More on that in a bit. But the underlying reasoning is simple: Vanguard is cheating state and federal tax authorities by charging its customers much less than other fund companies do.
We’ll return to the transfer pricing later as well. I’m not a tax lawyer so forgive me if I get this one wrong. Vanguard’s customers are also its shareholders. If they did raise the fee so as to make C corporate profits taxable at 35% - would not their rich customer/owners get a deduction off their taxable income which may now be at a rate of 39.6% (under Bernie make that 52%)? OK – let me turn to something I do get – transfer pricing:
Danon and Avi-Yonah argue that it is still required to charge “arm’s length” fees similar to what other management companies charge. At almost every mutual-fund group other than Vanguard, the management company is out to make a profit
I have a lot of respect for Avi-Yonah as a tax professor but when I read his report, I realized any competent economist for Vanguard could push back. And the reason is in that Morningstar report:
The asset-weighted expense ratio for passive funds was just 0.20% in 2014, compared with 0.79% for active funds.
Avi-Yonah’s analysis would take the overall average of 0.64% for the intercompany fee for Vanguard which is four times its costs. A profit to cost ratio of 300% sounds incredibly high. But Vanguard is a passive fund not an active fund. So wouldn’t the appropriate comparable fund analysis suggest a fee closer to 0.2% of assets under management so the profit to expense ratio would be around 25%? Justin Fox does a nice job of presenting whether or not the IRS could or even should pursue this. But if they did – one would hope their transfer pricing analysis would be a bit better developed.

Wednesday, February 10, 2016

Social Security Replacement Rates as Reported by the CBO

Brian Faler warned us a year ago:
Republicans on Friday named Keith Hall head of the Congressional Budget Office, installing a conservative Bush administration economist atop an agency charged with determining how much lawmakers’ bills would cost. Hall, who served on George W. Bush’s Council of Economic Advisers, is a critic of the Affordable Care Act who shares Republican skepticism of government spending and regulation.
Keith Hall just admitted:
After questions were raised by outside analysts, we identified some errors in one part of our report, CBO’s 2015 Long-Term Projections for Social Security: Additional Information, which was released on December 16, 2015. The errors occurred in CBO’s calculations of replacement rates—the ratio of Social Security recipients’ benefits to their past earnings.
Who were these outside analysts and what was this about? Alicia Munnell explains:
CBO suggests that Social Security is getting more generous every day. The stage is being set for cuts in Social Security, and the Congressional Budget Office (CBO) has become a major player in this effort. The agency's most recent report shows not only a huge increase in the 75-year deficit, but also an enormous increase in the generosity of the program as measured by replacement rates -- benefits relative to pre-retirement earnings. None of the changes that increase the deficit -- lower interest rates, higher incidence of disability, longer life expectancy, and a lower share of taxable earnings -- should have any major effect on replacement rates. CBO has simply been revising its methodology each year in ways that produce higher numbers
. Alicia provides the details and concludes:
Putting out such a high number without any effort to reconcile it with the historical data is irresponsible. And those waiting for an opportunity to show that Social Security is excessively generous have pounced on the new CBO replacement rate number and publicized it in op-eds from coast-to-coast. Social Security is the backbone of the nation's retirement system. Its finances need to be treated more thoughtfully.
Agreed. My only question is whether anyone in Congress can the courage to demand that Mr. Hall explain this irresponsible reporting.

It's been about resource control not sustainability or efficiency

An important point raised by Vandana Shiva is that the choice of technologies employed in modern industrial societies has not been chosen on the basis of 'efficiency' or 'sustainability'.  And neither, suggests the Reverend Thomas Malthus in 1830, have jobs been created to provide 'a living' for workers. 

"The increasing demand for agricultural labour must always tend to better the condition of the poor; and if the accession of work be of this kind, so far is it from being true that the poor would be obliged to work ten hours for the same price that they before worked eight, that the very reverse would be the fact;  and a labourer might then support his wife and family as well by the labour of six hours as he could before by the labour of eight....A great accession of work from manufacturers, though it may raise the price of labour even more than an increasing demand for agricultural labour, yet, as in this case the quantity of food in the country may not be proportionately increasing, the advantage to the poor will be but temporary, as the price of provisions must necessarily rise in proportion to the price of labour." ['And Essay on the Principle of Population']
 Malthus is clearly saying that 'inflation' is not a purely monetary phenomenon.  RIP Milton Friedman?

Exit Strategy? plus half a dozen or so years

M. King Hubbert, 1940:
By the year 1937 industrial production was again approaching and in some instances exceeding the previous all-time high in 1929. At this stage the spokesmen of business, still imbued with the doctrines of the economists concerning the efficacy of 'confidence' and apparently unaware that the government spending was the only important source for making up the deficit in the business budget, set up a hue and cry for the government to balance its budget. Promises to balance the budget were made and the excess of government expenditures over receipts was reduced from 4.8 billions of dollars in 1936 to 2.8 in 1937. The immediate consequence of this was the most drastic curtailment of industrial production yet known. Between September, 1937 and January, 1938--but 4 months--the volume of industrial production dropped by an amount which in the 1929 'crash' required the 20 months from October, 1929 to July, 1931.

Tuesday, February 9, 2016

BREAKING: Marco Rubio announces running mate

Taglines for Rubio

His latest bot episode has sent me to the drawing board:

“Vote for Rubio!  Do you really want to go through the rest of the primaries without him?”

“Rubio: he’s one weird dude.”

“Rubio for President: Nothing Can Possibly Go Wrong Go Wrong Go Wrong Go Wrong...”

Or you can play a game with it:

Who’s Marco’s favorite painter?  Botticelli.

Who’s Marco’s favorite chess player?  Botvinnik.

What’s Marco’s favorite country?  Botswana.

And so on.  Let the comments begin.

Sunday, February 7, 2016

Why The Secular Stagnationists May Be Wrong: Rapidly Falling Solar And Wind Prices

The voices of pessimistic secular stagnationists have been growing louder and louder.  Robert Gordon's recent book has been the poster boy recently, emphasizing technological stagnation, productivity slowdowns, and a lack of likely new products of any real value to humans.  He and Tyler Cowen focus on the relationship between IT and the rest of the economy, seeing a slowdown in productivity improvements in the economy coming from this important sector.  Lawrence Summers emphasizes demand side stagnation, but sees his view as complementary to the supply-side technological pessimism coming from Gordon and others.

A particular reason from the supply-side that these forecasts of increasing stagnation may prove to be oveblown comes from a sector that none of these doomsayers ever mention, but which remains fundamental to the world economy: energy.  In particular, both solar and wind energy have been experiencing dramatic declines in costs, which many are projecting will continue in the foreseeable future. For one among several sources on solar energy see Ramen Naam, from August, 2015.  Obviously one must take such projections with caution, but this post projects solar costs to be about two thirds of current ones in a decade and about half of current ones in two decades.  This is dramatic.  On wind a report from the US Department of Energy, also in August 2015, makes no projections, but reports costs in the low-cost interior of the US falling from $70/MWh in 2009 to $23/MWh in 2014.  Anything like this continuing would be important.  Their prices are now competitive with conventional sources.

Those who see these numbers, or ones like them, but dismiss them, emphasize what a small percentage of current energy comes from these sources (so far mostly useful for electricity production), although in certain locations such as Denmark have more substantial portions relying on them.  But, this is the point.  If  indeed we see dramatic further reductions in costs that put theses sources far lower in cost than current ones, we may well see massive investments in shifting to them that could substantially transform the energy sector of the world economy and the world economy itself more broadly, including allowing for major productivity increases and an acceleration of growth in the real economy, irrespective of whatever is going on in  the IT sector or whether wonderful new products that make the indoor toilet look boring and unimportant will be discovered.  Producing the same old stuff at much lower real costs can provide a powerful growth stimulus, not to mention that such sources would help substantially in dealing with the climate change problem.

A more sci fi issue is the possibility of getting commercially viable nuclear fusion breakthrough.  I am less optimistic on this front, where there have been many false announcements.  However, for better or worse, there seems to be a lot of noise on this front about possible breakthroughs, coming from such sources as the International Atomic Energy Agency (IAEA).  Thus, the possibility of some major breakthrough in this area could happen, and this could also be a major game changer as well.

Barkley Rosser

Friday, February 5, 2016

Tyler Cowen exposed!

Despite finding a high proportion of what Tyler  and Alex Tabarrok have to say about economics on their blog, Marginal Revolution,  maddening, I am a more or less regular reader, chiefly because Tyler's erudition in matters cultural and literary is astounding. Any book I think looks interesting, and that I add to  an impossibly long 'things to get to when I have more time," Tyler has already read.  But I am now taking him straight off the cultural sage pedestal I had heretofore placed him on: in an interesting interview with Kareem Abdul-Jabar, he asks the latter which are the most under-rated of Miles Davis' recordings. Kareem mentions Seven Steps to Heaven, and Porgy and Bess - good choices. (I like Miles Ahead - another Gil Evans collaboration, like P&B- and the amazing Birth of the Cool. )

But Tyler puts in his two cents, giving the nod to.......Fillmore East!, which he recommends as a "souped-up Bitches Brew." This is a recommendation? Say it isn't so, Tyler: you can't, can't, can't  be a lover of that horrible, terrible abomination that is "Jazz Fusion." No!

Tuesday, February 2, 2016

Dueling Economic Models and How to Score Them

An article in today’s New York Times compares two wildly different assessments of the proposed Trans-Pacific Partnership trade and investment deal, one by the Peterson Institute, a Washington think tank financed by business interests, and the other by the Global Development and Environment Institute (GDAE) of Tufts University.  The Peterson people tell us their model predicts income gains from TPP; GDAE’s model predicts losses.  The article is strictly he said, she said.

How should economists present their modeling work to the public?  And how should journalists report it?  The current dispute falls well short of best practice.  Here’s how I think it should go:

Modelers should list all the key assumptions embodied in their models.  In order to generate predictions, any model has to hold certain parameters constant; the technical term is “closing the model”.  (It’s because nothing is held constant in real life that prediction is so dicey.)  The results depend on which parameters are fixed in advance and how they’re fixed.  Reasonable people can disagree about how to do this, but there’s no way to discuss it unless the assumptions are presented openly.

Here’s an example.  Peterson uses the GTAP model (Global Trade Analysis Project) of Purdue, which I briefly discuss in my micro text in the chapter on general equilibrium theory.  This model assumes full employment and holds trade balances fixed, so that a trade deal shock is not permitted to change any country’s current account or unemployment rate.  It is erroneous, then, for the Times report to state that the Peterson economists “concluded” that “there would be no net change in overall employment in the United States.”  That’s not a conclusion—that’s an assumption.  There’s a big difference.  (Dean Baker critiques this assumption over on his soapbox.)

The GTAP model also assumes the optimality of market equilibration, so that any impediment to trade is necessarily welfare-reducing; the only question is how much, which is precisely what the model is designed to estimate.  Meanwhile GDAE does not make this assumption but is concerned instead with how a trade deal such as TPP will alter trade balances, which are not assumed to be fixed.

The way it should work is that each team, in presenting its results, would list all their key assumptions.  Journalists would translate these lists into terms that could be understood by their readers.  Then all of us could have an intelligent discussion about which set of assumptions is more appropriate to the questions we care about.

Second, economic models like GTAP and GDAE’s Global Policy Model are typically employed over and over.  They have track records.  Journalists should be able to review their prior predictions and tell readers how well they fared.  For instance, GTAP has been around for decades.  How well did it do in predicting the outcomes of past trade agreements or exchange rate adjustments?  Did it tell us anything useful in advance about China’s accession to the WTO?  And how has GDAE’s model performed?

The he said, she said approach is now recognized as unacceptable in reporting on climate change and other topics where the weight of evidence is crucial.  Economics shouldn’t be an exception.

Ownership,Trade and Equilibrium: Locke, Graunt and Gracian

"It is impossible that the primary law of nature is such that its violation is unavoidable. Yet, if the private interest of each person is the basis of that law, the law will inevitably be broken..." -- John Locke, Essays on the Law of Nature
Baltasar Gracian's Oráculo manual y arte de prudencia (1647), John Graunt's Natural and Political Observations made upon the Bills of Mortality (1662) and John Locke's Essays on the Law of Nature (1664) all appeared within the span of 17 years in the middle of the 17th century. Gracian bequeathed to economic discourse the philosophical concept of laissez faire, Graunt laid the foundations for quantitative social science, Locke unambiguously defined the natural law constraint that he later alluded to in the famous fifth chapter of his Second Treatise on Government, "Of Property."

"Is every man's own interest the basis of the law of nature?" Locke asked in the title of his eighth essay on the law of nature. "No," was his emphatic answer.

Why not? Because...
...when any man snatches for himself as much as he can, he takes away from another man’s heap the amount he adds to his own, and it is impossible for anyone to grow rich except at the expense of someone else.
Is that a zero-sum game, Locke is referring to? Yep, because...
...surely no gain falls to you which does not involve somebody else's loss.
Because taking more than one's share, is to rob others of their share, Locke reiterated in "Of Property."

Locke was not alone among his contemporaries in positing a zero-sum contest. Graunt -- with possibly an assist from William Petty -- argued that putting beggars to work would only take work away from non-beggars:
…if there be but a certain proportion of work to be done; and that the same be already done by the not-Beggars; then to employ the Beggars about it, will but transfer the want from one hand to another…
There is only a certain proportion of work to be done because, Graunt maintains, "there is but a certain proportion of trade in the world..."

This idea that there is only a certain proportion of work to be done or certain proportion of trade in the world would come in for rebuke from Dorning Rasbotham some 118 years later:
There is, say they, a certain quantity of labour to be performed. ... The principle itself is false. There is not a precise limited quantity of labour, beyond which there is no demand. Trade is not hemmed in by great walls, beyond which it cannot go.
Those who have listened to Sandwichman's rant over the years will recognize the above as the locus classicus of the "fixed amount of work" fallacy claim that David Frederick Schloss would eventually dub "Theory of the Lump of Labour." What I want to call attention to, though, is that the proponents of this fallacious theory were not ignorant poor people, shifty trade union agitators or vitriolic Luddites. They were the forefathers of political economic thought: John Locke, John Graunt and William Petty.

The identity of these zero sum proponents is significant, not because it lends prestige to the idea that there is a fixed amount of work but because of the idea's inextricable entanglement with the other contributions of these worthy gentlemen. Locke's vindication of private ownership of property is founded on and legitimated by his natural law philosophy. Rejecting that philosophy renders the subsequent rationale incoherent. The case against the adoption of Gracian's laissez faire and equilibrium by subsequent authors is more indirect but implicates the same premise of a closed system that when rejected, invalidates the conclusion.

The "obverse" of the lump of labor -- Say's law of markets -- relies fundamentally on equilibrium of supply and demand and on the sanctity of private property. Both principles must be discarded if the zero-sum, fixed amount of work, closed system is to be rejected.

Awareness of a fundamental anomaly in orthodox political economy keeps recurring -- Mill's recantation of the wages-fund doctrine, Keynes's repudiation of the "supply creates its own demand" dogma (after which it was supposed to have "sunk without trace"). John R. Commons succinctly identified the anomaly with the incongruous attributes of wealth, as defined by economists:
Going back over the economists from John Locke to the orthodox school of the present day, I found they always had a conflicting meaning of wealth, namely a material thing and the ownership of that thing. But ownership, at least in its modern meaning of intangible property, means power to restrict production on account of abundance while the material things arise from power to increase the abundance of things by production, even overproduction.
Ownership is thus opposed to abundance that escapes its grasp. Perhaps Locke was on to something after all when he observed that "it is impossible for anyone to grow rich except at the expense of someone else." But it is not a physical amount that the grasping individual steals "from another man's heap." It is instead a capability and productive potential that the wealthy monopolize and hoard. One of the ways the owners impose on everyone else is by propagating myths about the sanctity of private property, the self-adjusting character of the price system and the fallacy and futility of any attempt by anyone other than owners to regulate or restrict production on behalf of the wider community of non-owners.

Monday, February 1, 2016

Eugenics and Other Specious Biological Constructs

My previous post was triggered by Tyler Cowen’s evident attachment to the negative freedom criterion beloved by libertarians; that’s why he recommended Mill, who was hardly free of the national and racial stereotypes typical of his age and social station.  But I should say a word about his actual argument.

It appears to be true that there was an affinity between early 20th century Progressives and eugenics, but there was hardly a one-to-one mapping between these groups.  Some Progressives, apparently including Dewey, were skeptical, and many eugenics enthusiasts, like Irving Fisher, were resolutely anti-Progressive.  Something else was going on.

I think it helps to step back from this one issue for a moment and consider the larger terrain.  Over the past few centuries there have been repeated waves of intellectual and political fervor stemming from crude biological visions of human life.  It comes in a blinding flash: we are animals!  We are subject to the same laws that govern all other species!  Politics and culture are just biology in disguise!

And so simplistic assumptions about population growth and environmental carrying capacity have been with us since Malthus (and even earlier as Cohen showed).  Social Darwinism identified economic competition with phenotypic selection.  The eugenics crowd thought we could improve the human race the same way corn and cattle are selectively bred.  First generation sociobiologists carried similar baggage.  The core inspiration is neither left nor right, but biologically determinist at the level of crude analogy.

If you’ve ever tried to reason with a population growth fundamentalist you’ll recognize what I’m talking about.  Forget about demographic transitions or distinctions between the cost and feasibility of sustaining populations of various sizes.  It all comes down to petri dishes and exponential growth.  There’s something about the simplistic biological vision that captivates the mind and crowds out subtler forms of reasoning.

Just to be clear, I’m not arguing that biology doesn’t matter.  Of course people are organisms.  Of course population matters, and human traits have continued to evolve through the past two million years of our existence.  No doubt our emotional proclivities at some level have a genetic component.  But all of these things are complex and multiply caused.  The starting point is evidence and an open mind, not to mention real biology in all its intricacies, and not simplistic stereotypes.

So eugenics was one expression of a continuing thread in modern, “scientific” culture.  You could spin it to fit with progressivism or conservatism, but its real source lies elsewhere.

Piling on With Dean Baker On It Is Monday and Robert Samuelson Wants to Cut Social Security and Medicare

Yes, it is Monday, and once again Robert J. Samuelson of the Washington Post is whining about "We can't keep ignoring our dangerous deficits," which he sees as half of future increases being due to rising spending on Social Security and Medicare."  The inimitable Dean Baker at Beat the Press has done an excellent job of beating his silly arguments to a lumpy and barely visible pulp.  However, I shall add a few more points that he did not mention, just to pile on to how ridiculous RJS  and the broader campaign of WaPo on this subject is and has been.

So, what is Samuelson's excuse for putting out yet another one of these hysterical and misleading columns?  Ah, it is a new report out last week from the Congressional Budget Office, (CBO), which I think both Dean and I have plenty of respect for.  This new report does indeed project somewhat  higher future deficits (and debt) than their last report.  As of 2015, the cumulative new debt is projected to be $8.5 trillion rather than $7 trillion. This would move the debt as a percentage of GDP to 84% from 75% in 2015.  He then declares that "Many economists think the rising debt is unsustainable," although somehow he fails to mention a single one by name, and offhand I fail to find this all that scary.

What is the source of this somewhat elevated projection of debt levels?  It looks like most of the known debatable assumptions about increases in costs of Social Security and Medicare and interest rates on the debt have not been changed from the last report.  What does seem to  have been changed is the projected GDP growth rate, lowered from 3% annually to about 2%, or something like that.  Needless to say, lower future GDP growth rates do imply higher future debt levels, assuming everything else in the taxing and spending remains unchanged.

Well, I do not know what is going to happen to future growth, and it may be 2% or even lower.  But maybe it will not be.  There has been a major barrage of publicity about "secular stagnation" recently, whether of the supply side-technological pessimism variety of Robert Gordon and Tyler Cowen or of the demand side of Larry Summers.  Gordon's views have especially received a lot of attention recently with the  publication of his latest book on this, which seems to have  been reviewed by just about everybody and his  brother.

OK, so I was on an EPS panel with Gordon about four years ago at the ASSA meetings where he was already laying out all the arguments in this book.  Much of this amounts to noting that we are not going to have as dramatic changes as getting indoor plumbing in the future.  OK.  And, yeath, the computer productivity increases do seem to have been lower since 2005 than during the decade prior, ouch.  And, yeah, he and Cowen, who also focuses on computers as our only main possible improvement in productivity and growth, may well prove right.

But they could easily both be wrong.  The obvious sector that could do it would be energy.  We are seeeing dramatic declines in the cost of alternative energy sources such as solar and wind, not to mention that we might yet get some kind of revolutionary breakthrough on the fusion front.  In any case, none  of these people seem to taking into account what the implications would be if we saw say a cut in half over the next decade of basic energy costs.  Even without some major inventions of final new goods that match indoor plumbing or being able to text each other, such a cut in costs would massively increase the projections for productivity and growth gains over the next decade.

Let me be clear that I am not dinging the CBO on this.  They are a famously cautious outfit, and I do not blame them for taking account of the recent pessimistic noises coming from so many sources.  They should be taken seriously.  At the same time we should be aware that there is a real upside chance here, and even if the more pessimistic outcome comes to pass, an 84% of debt/GDP ratio simply is not all that much worse than a 75% one, and as Dean notes, we are paying less than half in interest on the national debt per GDP than we were back in 1990.  So, yet again, Samuelson and WaPo are simply being hysterical as they try to scare people into cutting Social Security and Medicare.

Addendum, 3:10 PM:  Oh just to add to Samuelson's egregiousness is when he ties this to the presidential race.  He declares that none of the candidates are addressing this, but he focuses on the two leading Dems for not wanting to cut these entitlements or even wanting to add to them, oh evil candidates they.  Only one Republican gets briefly mentioned, Trump, whose proposed tax cuts really are humongous and would indeed lead to far greater deficits than either of the Dem candidates' proposals.  The rest of the GOP candidates are not mentioned, even though all of them are proposing massive tax cuts that will inevitably lead to hugely increased deficits if enacted, even with the spending cuts some of them are proposing.  But none of this is worth mentioning by our RJS.

Barkley Rosser

Saturday, January 30, 2016

Freedom: Three Varieties and a Caveat

What follows is a very brief summary of an appendix in my micro textbook that addresses the libertarian case for free markets.  It was triggered by the comment of Tyler Cowen that the left needs more Mill.

There are three kinds of freedom, each valid.  The first is negative freedom, “freedom from”, which means simply freedom from external coercion.  This is what underlies the libertarian attachment to free markets.  The second is positive freedom, “freedom to”, which seeks to provide people the means to realize their (feasible) objectives.  Traditionally the left has seized on this notion to justify redistributive institutions and policies.  The third is “inner freedom”, freedom from habit, custom, and unreflected assumptions, which was the core message of German idealism, English and French Romanticism and American Transcendentalism (and, at its best, rock and roll).

In a perfect world we would bask in all three of them.  Unfortunately, each makes demands on the others, and there is no universal criterion for striking a balance.  The first step toward a reasonable politics of freedom, however, is to simply recognize that no one conception is sufficient by itself.

Finally, it’s important to recognize that freedom, according to any interpretation, is always limited by obligation.  In particular, we have obligations toward children, the very old or disabled and others who depend on us for the necessities of life.  One way collective action can widen the domain of freedom is by helping us to meet these responsibilities more efficiently.  Consider, for instance, how public education and pension systems (like Social Security) widen the scope for parents and children of their elderly parents to be freer in other aspects of their lives.

Friday, January 29, 2016

A Theory Explaining Why Severe Weather is Occurring

Piecing the current theory together:

Global warming is slowing the gulf stream system, also known as the Atlantic Meridional Overturning Circulation (AMOC). The AMOC is a gigantic ocean system that’s driven by differences in temperature and the salinity of sea water. Ocean temperatures off the U.S. east coast are warming faster than global average temperatures and there’s a “cold blob” in the subpolar Atlantic understood to be sourced from Greenland ice-melt water. These latter two features are regarded (by some scientists) as a characteristic response to a warmer world. The slowdown of the AMOC is in turn, a result of the ocean freshening at high latitudes due to these large infusions of meltwater from Greenland resulting in a cooling in the North Atlantic region, as less ocean heat reaches the region — aka, the “blob.”. The far North Atlantic waters are being diluted by the Greenland melt waters and are no longer salty enough. Therefore the waters don’t sink as much, and this slows (or may even eventually shut down the AMOC circulation. The AMOC global conveyor has been weakening, by the way, since the late 1930s. The slowing of the Gulf Steam System/AMOC should drive faster sea level rise on the East Coast where sea level rise for a 600-mile-long “hotspot” along the East Coast (north of Cape Hatteras) has already been measured at “3-4 times higher than global average”. A 2015 discussion paper by some of the world’s leading climatologists argues that “Shutdown or substantial slowdown of the AMOC, besides possibly contributing to extreme end-Eemian (brief? sea level) events, will cause a more general increase of severe weather.”

(i) The surprising way that climate change could worsen East Coast blizzards
By Chris Mooney January 25, 2016

(ii) Recent studies from the National Oceanic and Atmospheric Administration found that ocean temperatures off the U.S. East Coast are expected to warm three times faster than the global average. The warming coincides with increased C02 emissions.

(iii) Stefan Rahmstorf of the Potsdam Institute for Climate Impact Research, an expert on the Atlantic circulation phenomenon known by the technical name meridional overturning circulation, or AMOC.

(iv) The Greenland melt. Eric Steig. 23 January 2013.

(v) Is Climate Change Supercharging Storms Like Jonas And Sandy More Than We Thought? by Joe Romm Jan 25, 2016 4:41 pm

(vi) Blizzard Jonas and the slowdown of the Gulf Stream System.
Stefan. 24 January 2016