Thursday, September 29, 2016

Navarro’s Nonsense on Net Exports

Paul Krugman and Scott Sumner focus on the trade balance discussion by Peter Navarro. After all – this part of his nonsensical writing was the big enchilada. Scott leads with:
This is a very basic error. International economists almost universally agree that a VAT is neutral with respect to trade. An across the board 10% import tax, combined with a 10% export subsidy, offset each other, leaving no net impact on trade. Instead they convert the tax from a production tax to a consumption tax. But it's a consumption tax that applies equally to all goods, whether made domestically, or imported. This is not even a tiny bit controversial.
Paul agrees:
nobody thinks that sales taxes are an unfair trade practice. New York has fairly high sales taxes; Delaware has no such tax. Does anyone think that this gives New York an unfair advantage in interstate competition?
AS I noted here, the medical device giants argued against their excise tax on precisely opposite reasoning, which was also absurd. I think the point here is that the WTO rightfully does not see sales taxes as interfering with free trade. Of course Team Trump likely cares little about the WTO. So why not put tariffs on Mexican goods. Of course our bilateral trade deficit with Mexico was only $58 billion in 2015 as compared to the $102 billion trade deficit with the EU (mostly) Germany. Europe does VAT so why did Trump not go after Merkel? Is he afraid of this woman? Of course our largest bilateral trade deficit is with China. Scott goes after the alleged Chinese manipulation of exchange rates with:
China is not intervening to lower the value of the yuan; they are intervening to raise its value. And no, textbook theory does not say that exchange rates should adjust in the long run to balance trade in goods and services, unless long run means 1,000,000,000 years, in present value terms. But in that case the current US deficit presents no puzzle; it hasn't lasted for a billion years. Textbooks say that exchange rates should adjust in the short run to balance trade in goods, services and assets. Trade deficits (actually current account deficits) are caused by imbalances between domestic saving and domestic investment. Those can persist indefinitely. And currency "manipulation" (which is a meaningless concept) is completely beside the point. A country can have a laissez faire policy towards its currency, and still run deficits or surpluses for centuries. Now let's think about the broader Trump economic plan, how would that impact the saving/investment relationship? To make my point more clearly, I'll compare his plan to Reagan's, which has some similarities:
There is a lot of good reasoning here that I would like to expand upon. My concern was that Navarro was all Keynesian with no consideration of where output was relative to potential GDP or the impacts on potential GDP. Navarro proposed using some sort of trade protection to raise net exports by $500 billion per year. That might have a big aggregate demand impact under the assumptions of fixed exchange rates and fixed interest rates, which of course is the most basic Keynesian model that Navarro both mocks and uses. One can wonder whether the output gap now is really that large. Of course, I have suggested that perhaps the output gap may indeed be as much as 5 percent but other economists suggest it is smaller. Scott is noting, however, the Trump wants to increase defense spending and massively cut taxes which push aggregate demand so high that the Federal Reserve would have to raise interest rates. We should also note how various policy positions work in a standard Mundell-Fleming model. Take monetary policy for example:
An expansionary monetary policy will shift the LM curve to LM’, which makes the equilibrium go from point E0 to E1. However, since now exchange rates are flexible, the balance of payments deficit will depreciate the domestic currency. This will increase net exports, shifting the IS curve to IS’. Also, since domestic assets are less expensive, the BP curve will shift to the right (to either BP’+ or BP’-). Therefore, with high capital mobility, final equilibrium will be at point E2. Monetary policy works well under these assumptions. It’s actually the more efficient the higher capital mobility is.
Of course this is what the ECB has recently done. The US Federal Reserve alas has allowed our interest rates to drift up relative to interest rates in Europe which is why the US$ has appreciated lowering net exports. And yet Trump has criticized the Federal Reserve for allegedly pursuing too much monetary stimulus. Go figure. Another key implication of this Mundell-Fleming model is trade protection under floating exchange rates will only serve to further appreciate the US$ with no net impact on net exports or the economy.

Tuesday, September 27, 2016

Peter Navarro’s Scoring of Trump’s Economic Proposals

My inbox just received a weird hodgepodge of economic claims ala Peter Navarro:
Donald Trump’s economic plan proposes tax cuts, reduced regulation, lower energy costs, and eliminating America’s chronic trade deficit. Trump’s goal is to significantly increase America’s real GDP growth rate and thereby create millions of additional new jobs and trillions of dollars of additional income and tax revenues. Hillary Clinton’s economic plan will inhibit growth.
Does Navarro have an actual model that supports these claims? I’m asking the econoblogosphere to check out this weird set of assertions lest I’m being unfair here. But this entire paper looks like some strange exercise in cutting and pasting that one might find from a high school student who did not know how to write an actual analysis. Let’s read on:
Separately from this report, the non-partisan Tax Foundation has released its analysis of the Trump tax plan. It dynamically scores a $2.6 trillion reduction1 in revenues relative to the current tax policy baseline as of the end of a 10-year budgeting horizon. However, as is the typical practice within the modeling community, the Tax Foundation does not score other elements of the Trump economic plan that are growth-inducing and therefore revenue-generating. This report fills this analytical gap. Specifically, we provide our own fully transparent scoring of the Trump economic plan in the areas of trade, regulatory, and energy policy reforms based on conservative assumptions. Along with tax reform, these areas represent the four main points of the Trump policy compass. Each works integratively and synergistically with the others and in conjunction with proposed spending cuts.
Integratively and synergistically! Wow – this must be some incredible model. But as we read on, Navarro contradicts himself:
Donald Trump’s tax, trade, regulatory, and energy policy reforms deal with the root causes of this problem. Trump understands that our economic problems are long run and structural in nature and can only be addressed by fundamental structural reforms. This is a key distinction between Donald Trump and an Obama-Clinton strategy that has relied so heavily – and futilely – on repeated fiscal and monetary stimuli. All we have gotten from tilting at Keynesian windmills… The growth in any nation’s gross domestic product (GDP) – and therefore its ability to create jobs and generate additional income and tax revenues – is driven by four factors: consumption growth, the growth in government spending, investment growth, and net exports. When net exports are negative, that is, when a country runs a trade deficit by importing more than it exports, this subtracts from growth.
Navarro first mocks Keynesians and then basically tells us he is running a purely Keynesian exercise? I bet Gerald Friedman is screaming that he did that and he got hammered for it. As I read this latest exercise, I did not find a shred of consideration of things like potential GDP and how it might evolve over time in response to the Trump proposals. We do see this claim:
To score the benefits of eliminating trade deficit drag, we don’t need any complex computer model. We simply add up most (if not all) of the tax revenues and capital expenditures that would be gained if the trade deficit were eliminated. We have modeled only the impacts of implicit profits and wages, not any other economic aspect of the increased activity.
I’m sorry but we do need to model out the supply side. If Navarro does not know this – he is not qualified to do the analysis.

Monday, September 26, 2016

The Mystic Labyrinth of Free Trade

It seems after all that the free-trade doctrine is just a more subtle form of mercantilism. -- Joan Robinson
In The Wealth of Nations, Adam Smith built his case for his 'system of natural liberty,' in part, on a polemic against the alleged 'mercantile system.' Since the late 1930s historians have questioned the 'systematic' nature of the discourse labeled mercantilist. A. V. Judge wrote, in 1939, "Mercantilism never had a creed; nor was there a priesthood dedicated to its service." D. C. Coleman amplified those doubts two decades later, observing that, "as a label for economic policy," the term 'mercantilism':
...is not simply misleading but actively confusing, a red-herring of historiography. It serves to give a false unity to disparate events, to conceal the close-up reality of particular times and particular circumstances, to blot out the vital intermixture of ideas and preconceptions of interests and influences, political and economic, and of the personalities of men, which it is the historian's job to examine.
A red herring is an "irrelevant diversion" but in this case the image of the red herring may itself be a red herring. The diversion is relevant, after all -- just not in the way it has usually been understood. Taking a cue from Robinson's witticism about the free-trade doctrine, a more apt metaphor for the diversion would be mirror maze, such as found in old amusement parks. Laissez faire caught a fleeting glimpse of itself stealing 'round the edge of a mirror and mistook it for a bête noire. The mercantile system was Smith's system of natural liberty's reflected double.


A funny thing happened on the long and twisting road from Smith's polemic to the neoclassical growth model: the return of the repressed. The mortal sin of the mercantile system, "this popular notion, that wealth consists in money or in gold and silver," snuck back in disguised as the 'aggregate value' of capital in the production function -- ectoplasmic leets! Leets are BETTER than money, though, because although they look and act just like money, they are not money because the neoclassicals call them 'capital'. 

That's no red herring; it's a mystifying labyrinth. The gigantic puzzle that all are trying to solve. As great a puzzle as human ingenuity can provide. No amusement in the world like it. A high class, refined and elevating entertainment. Mysterious and laughable.

Sunday, September 25, 2016

The Case for Equilibrium: coinage, usury and bills of exchange

In my previous post, I discussed Joan Robinson's objection to the concept of equilibrium as precisely the habitual mode of thought from which Keynes had struggled to escape:
The concept of equilibrium is incompatible with history. It is a metaphor based on movements in space applied to processes taking place in time. 
I agree substantially with Robinson but I also would admit there is some compatibility between equilibrium and history. The case I am thinking of involves a direct correspondence between "movements in space" and "processes taking place in time."

Raymond de Roover's Gresham on Foreign Exchange sought to contextualize the memorandum de Roover attributed to Thomas Gresham (probably incorrectly) in relation to early modern English monetary standards and foreign exchange mechanisms. That memorandum, written to inform the 1564 Royal Commission on the Exchange, subsequently became a much cited and plagiarized source for 17th century English debates about trade policy, which are now characterized as "mercantilist."

Metallic money minted into coins has two complicating characteristics that lead to further complications. Coins wear out and the mint charges seigniorage on the bullion that it buys from merchants. This means that older coins in circulation will eventually contain less silver or gold than new coins. At some point, people are tempted to hoard new coins or "clip" them. The mint may initially debase new coins as a countermeasure and subsequently as a source of revenue.

The price of silver or gold cannot fall below the seignorage price because the mint will buy it at that price. It also can't rise too high above the nominal value of the coins or people will melt down coins to sell as bullion. Thus there is a small but significant range within which the price of bullion can fluctuate.

These tiny perturbations are magnified in international trade. Meanwhile, piracy and bad weather create disincentives for shipping sacks of specie or stacks of bullion back and forth across the seas. Bills of exchange enable accounts to be settled on paper.

Bills of exchange also have another useful feature. They enable interest to be charged on loans without it being considered usury. That is because the banker's profit on a bill is uncertain due to fluctuations in the exchange rate between currencies. The exchange rate for a bill is determined by the par values of the two currencies, the terms of trade between the two countries and the supply of and demand for credit. The otherwise certain profit of usury is made uncertain by the other components of the exchange.

Needless to say, bankers almost always profited on these financial instruments. This led to suspicions of manipulation in the foreign exchange market and proposals for remedies for such suspected frauds. Although some sharp dealing inevitably took place, bankers didn't have to be manipulating the money market. They knew the money market. They monitored seasonal fluctuations in trade of different commodities. They observed the debasements and re-coinages of governments and estimated their effects.

Because of their unique characteristics, foreign exchange money markets did indeed usually tend toward equilibrium. But here is where I would like to suggest that what would appear to be a tendency toward equilibrium taking place in time was actually a movement in space. Bills of exchange had both a duration and a geographical element. A merchant would draw English money in London to be repaid, say, in Flemish money a month later in Antwerp. The fluctuations, over time, in the values of the respective currencies reflected the movements of commodities between locations as well as policies enacted by authorities in the two places.

Foreign exchange markets tended toward equilibrium only because of their unique characteristics. These characteristics are not shared by commodity markets in general. There is no "mint" that buys capital equipment at a mandated price to stamp it into other capital equipment. If there was, then Joan Robinson's satirical (and neoclassicism's implicit) leets would be a workable approximation of reality. Leets, that is to say, are just like money -- only better!

The New Men Without Jobs Conservative Excuse

FRED notes that the employment to population ratio for men aged 25-54 was 87.5% before the Great Recession. It fell to less than 81% during the Great Recession and has risen back to only 84.5%. Keynesians like myself see this as evidence that we still need more of an aggregate demand boost. We had fun with the Tyler Cowen porn excuse but it seems Nicholas Eberstadt (AEI) also thinks the low level of employment for this group is due to some inward shift of their labor supply curve:
“In the half-century between 1965 and 2015, work rates for the American male spiraled relentlessly downward, and an ominous “flight from work” commenced…The collapse of male work is due almost entirely to a flight out of the labor force—and that flight has on the whole been voluntary. The fact that only 1 in 7 prime-age men are not in the labor force points to a lack of jobs as the reason they are not working.”
Pardon the interruption Nick but I have a couple of problems already. The relentless spiral started with the Great Recession as any downward trend before that was quite mild. But you seem to contradict yourself already. You note there is a lack of jobs even as your measure of its importance is very suspect. And yet you claim it is a flight from work. A decline in the labor force participation rate is not necessarily a voluntary leaving of the labor force. I guess the AEI never heard of the discouraged worker effect. But let’s have Nicholas continue:
“America’s prime-male workforce participation has been declining at a virtually linear rate for half a century–a trajectory unaffected by good times or recessions.”
Another misrepresentation akin to this relentless spiral but don’t let me interrupt:
“these unworking men are floated by other household members (wives, girlfriends, relatives) and by Uncle Sam.”
I am unaware of some Congressional decision to expand the safety net so is he saying hard working ladies are taking in lazy boyfriends for their good lucks? I can only speak for my city but this does not describe the dating scene in Manhattan. I’m sorry Nick – please continue:
“There is one other important piece to this puzzle, and it has to do with crime and punishment. Everyone knows that millions of criminal offenders today are behind bars–but few consider that many millions more are in the general population: ex-prisoners, probation cases and convicted felons who never served time. In all, America may now be home to over 20 million persons with a felony conviction in their past, and over 1 in 8 adult men. Men with a criminal history have much worse odds of being or staying in the labor force, regardless of their ethnicity or educational level. The explosive growth of our felon population, unfortunately, helps to explain some of the otherwise puzzling peculiarities of America’s male work crisis.”
I’m having a difficult time squaring this spin with the decline in the crime rate over the past generation. But here is the one thing neither Nick nor Tyler bothered to square with this alleged inward shift of the labor supply curve story. Under their story, real wages would have increased. And yet, real wage growth has been quite weak. Do they teach basic supply and demand at GMU or the AEI anymore?

Saturday, September 24, 2016

All Models are False: The Internet/Computer Explanation of Major Recessions

Uneasy Money has a wonderful post on the “all models are false dodge”. Nothing really to add but I especially enjoyed this:
Romer’s most effective rhetorical strategy is to point out that the RBC core of modern DSGE models posit unobservable taste and technology shocks to account for fluctuations in the economic time series, but that these taste and technology shocks are themselves simply inferred from the fluctuations in the times-series data, so that the entire structure of modern macroeconometrics is little more than an elaborate and sophisticated exercise in question-begging.
I used to ask the New Classical crowd what the great negative real shock was during the early 1980’s. The massive real appreciation of the dollar may have lowered net export demand but that was one of those Keynesian things. One would think the rise in the relative price of domestically supplied goods would have increased employment. Same with the alleged wonders of the Reagan tax cut. Oh but it was paid for by reducing transfer payments – another one of those Keynesian things. If poor people got less government assistance, then they should have gone all Jeb! and worked harder. And of course we were enjoying the start of the computer and technology revolution. But here is where the list gets hysterical – the line was that these new tools were being used to do less work in the office. But before you fall in the floor laughing at this excuse consider a recent excuse ala Tyler Cowen:
There are a few reasons, but the internet may be the biggest. It is easier to have fun while unemployed. That's a social problem for some people.
Tyler was debating Noah Smith. Noah had just argued for more infrastructure investment on the Keynesian notion that we were still below full employment. Tyler seems to think the low employment to population ratio is still somehow consistent with full employment. Noah disagreed noting that real wage growth is weak to which Tyler continues:
Maybe employers just aren't that keen to hire those males who prefer to live at home, watch porn and not get married. Is that more of a personal failure on the part of the worker than a market failure?
Oh my – boys will be boys! Noah had some good counters including:
Female labor force participation in the U.S. is well below its pre-crisis level. Maybe video games are now marketed equally toward men and women.
Thankfully Tyler did not respond by suggesting the ladies in the office were going crazy over hot dudes on Instragram.

Friday, September 23, 2016

Equilibrium and Information Literacy

"Everybody except Joan Robinson agrees about capital theory." -- Robert Solow (as paraphrased by Robinson)
An essential text in my researches on mercantilism, usury and bills of exchange is Raymond de Roover's Gresham on Foreign Exchange, which just happens to be stored in part of SFU's library that is under construction and thus inaccessible. The immediate unavailability of that book, however, led to a fortuitous discovery.

I browsed in the call number section of the library's general collection where de Roover's book would have been and Robert Leeson's Ideology and the International Economy caught my eye. I flipped through the book and noticed on page 19 the delicious quote from Joan Robinson that, "the free-trade doctrine is just a more subtle form of mercantilism."

The quote is from a 1966 lecture, "The New Mercantilism" that is included in a collection of essays, Contributions to Modern Economics, which also contains "Capital Theory Up-to-Date," a 1970 review of C. E. Ferguson's The Neoclassical Theory of Production and Distribution, in which Robinson reprises her parody of neo-Walrasian, neo-neoclassical capital "leets." Leets is steel spelled backward and makes its debut in "Equilibrium Growth Models," Robinson's 1961 review of James Meade's Neo-Classical Theory of Economic Growth.

This allegedly ectoplasmic representation of capital is, in a nutshell, the crux of the "Cambridge capital controversy," which Robinson launched with her 1952 challenge, "I leave it to those who draw production functions to say what marginal productivity and the elasticity of substitution mean when labour and capital are the factors of production." Looking back, in 1978, on her 1952 essays and the "long struggle to escape... habitual modes of thought and expression," Robinson stressed that "it was precisely from the concept of equilibrium that Keynes was struggling to escape..." Contrarily, though:
"...textbook teaching in the department of so-called macro theory was an attempt to push Keynes into short-term equilibrium. ... The grand neoclassical synthesis (now known as bastard Keynesianism) was a more ambitious attempt to reduce the General Theory to a system of equilibrium."
In responding to Robinson's leets critique, Robert Solow began by acknowledging "much truth" to the objection that "the usual production functions, allowing for more or less substitutability between capital and  labor, attribute to 'capital' a degree of malleability which contradicts common observation." He then distinguished between the "econometrically-minded person" who would view the overly malleable capital as a "specification error" and others -- presumably including Robinson -- who judge it to be "a doctrinal error; and its consequence is a kind of Fall from Grace." Seven years later, Robinson had this to say about "doctrinal disputes":
Many economists, nowadays, who are interested in practical questions are impatient of doctrinal disputes. What does it matter, they are inclined to say, let him have his leets, what harm does it do? But the harm that the neo-neoclassicals have done is, precisely, to block off economic theory from any discussion of practical questions.
If one is concerned about actual unemployment in an actual economy, Robinson later explained, one "has to discuss it in terms of processes taking place in actual history. The concept of equilibrium is incompatible with history. It is a metaphor based on movements in space applied to processes taking place in time." In other words, it is not just some kind of ethereal affectation to object to the concept of equilibrium -- it is an argument with irrevocable real-world consequences.

The failure of what Robinson dismissed as "bastard Keynesianism" also had real-world doctrinal consequences. "In the era of stagflation, this notion [that equilibrium growth can be achieved through fiscal and monetary 'fine tuning'] has been discredited and the quantity theory of money is blossoming afresh amongst its ruins." This 'blossoming,' incidentally, was not something Robinson welcomed.

Well, my interlibrary loan of de Roover's Gresham on Foreign Exchange has arrived, so I'm off up the hill to pick it up. To be continued...



Thursday, September 22, 2016

How Many Ways Can Niall Ferguson Contradict Himself on Economics?

His latest:
To see why Trump is gaining on Clinton, despite his numerous flaws as a candidate, just compare their economic policy proposals. With Clinton you get more of the same: more spending (approximately $1.5 trillion over the next decade)—a large proportion of it on infrastructure—paid for by higher taxes on richer households, plus more regulation, especially of banks and pharmaceutical companies. Call it Obama+: the trains go round in circles, the government keeps on growing, but the economy as a whole limps along at 2% a year. By comparison, Trump offers acceleration along a new track, albeit at the risk of derailment. This is true even when he is on his best, scripted behavior, as he was on Thursday at the Economic Club of New York. Much of this speech was red meat for the Republican establishment he needs to keep on board: tax simplification and tax cuts, increased spending on defense and border security and deep cuts in environmental and consumer-protection regulation. Ironically, the Keynesian economists who support Clinton are on the wrong side, because even the Trump campaign admits his tax cuts would cost $4.4 trillion over the decade. He, not Clinton, is the true candidate of stimulus, as his budgets would only come close to balancing if growth went up to 3.5 percent a year. And on top of all that are Trump’s earlier pledges to restrict immigration, free trade and offshoring, pledges that are especially appealing to those Americans who feel most pessimistic about the future.
So Clinton’s proposals are going around in circles because they offer fiscal stimulus but Trump’s proposals will accelerate economic growth because they offer fiscal stimulus? In what model do large increases in defense spending lead to more economic growth that increases in infrastructure investment? Or is Niall touting the Laugher Curve nonsense that lower tax rates and deregulation of the financial and other sectors will lead to an economic miracle ala the Cochrane removing the weeds from the garden thesis? Oh wait – Trump is also calling for restrictions on trade and immigration. So is it that some aspects of deregulation promote growth whereas free trade restricts growth? Can we see Niall Ferguson’s economic model that quantifies the economic growth from the Trump proposals?

Wednesday, September 21, 2016

One Man's Profit is Another's Loss

There is this fixed quantity of whatever it is and if you get more, I get less. One man's profit is another's loss.
This dogma was already advanced by some ancient authors. Among modern writers Montaigne was the first to restate it; we may fairly call it the Montaigne dogma. It was the quintessence of the doctrines of Mercantilism, old and new. -- Ludwig von Mises
Add "the Montaigne dogma" to the collection of pejorative phantoms: mercantilism and Malthusianisme, image of limited good, zero-sum fallacy, Luddite fallacy, fixed Work-fund and the theory of the lump of (labor, labour, work, jobs, output).

Except... it really ought to be the Seneca dogma since Seneca was the ancient author whose de Beneficiis Montaigne faithfully borrowed from for 'his' essay (find "Demades"). Even Seneca was elaborating on an older maxim by Publilius.

Is it ever true that one man's profit is another's loss? You bet! I just gave an example -- gambling and other contests of skill or luck are typically zero sum. Your loss is my gain. Our loss is the house's gain.

But there is a more historically-pertinent operation of the zero-sum game: bills of exchange. As I remarked in that earlier post, one of the prime motivations for early modern merchant bankers to adopt the novel and challenging technique of double-entry bookkeeping was to "prove an alibi" against suspicions of usury. The way that bills of exchange were accounted for made them one of the favorite financial instruments for avoiding an appearance of usury. Raymond de Roover explained:
As a result of the usury prohibition, bills [of exchange] were never discounted but were bought at a rate of exchange which fluctuated up and down according to the conditions prevailing in the money market. There is no doubt that interest was received by the banker who invested his money in the purchase of bills, for a hidden interest was included in the rate of exchange. Because of this subterfuge, the structure of the money market was such that exchange fluctuations were caused either by a change in the rate of interest or by a change in the terms of international trade.
Interest was thus concealed in the exchange rate charged by the banker. As a consequence, the profit on any given transaction was uncertain. A banker, however, could rely on his long-run observation of the fluctuations in the terms of international trade to achieve a high degree of predictability covering a large number of transactions.

By the middle of the 16th century, the use of bills of exchange had become common enough in trade between England and the Low Countries to raise suspicions about manipulation of exchange rates by bankers. This suspicion was articulated in the memorandum prepared for the 1564 Royal Commission on the Exchange, which noted the 'usurious' undercurrents of different exchange rates prevailing simultaneously in London and Antwerp:
…when the English pound is paid for a month before hand [in London], then the price thereof in reason ought to be the less; and when the English pound is not paid for in Flemish money until a month after hand [in Antwerp], then the price in reason ought to be the more. But here you may perceive that this necessary and fair name Exchange might be truly termed by the odious name of buying and selling of money for time, otherwise called usury.
The memorandum then went on to describe "how private gains may be made when the Exchange goeth too low" and "how the bankers do cunningly fall [or raise] the exchange at Antwerp." Among the remedies proposed for such manipulation of exchange rates was to "govern this realm by good policy" such that would "temper and forbear the superfluous delicacies" of imported goods and cause English exports "to be wrought to the best value before they are vented." The resulting trade surplus would raise and maintain the value of the English pound.

Of course not every country can run a trade surplus all the time. For the world as a whole, the balance of trade is indeed a zero-sum game.

There are, however, not one but three issues bound up together in the memorandum on exchange. The first is usury and its concealment in the exchange instrument. The second is the effect of exchange fluctuations on the profits and losses of bankers and merchants. And the third is the manipulation of exchange rates, either by bankers for the private gain or by government to counter the cunning tricks of bankers.

Nowadays, we no longer have to worry about fraud by bankers. The old superstitious prejudices against usury have been supplanted by an enlightened embrace of the unequivocal blessings of credit and debt. Comparative advantage has proven that it is economically illiterate to question the universal benefit of globalization.

Verily, we can embrace the von Mise-erly wisdom that "There are in the market economy no conflicts between the interests of the buyers and sellers." One man's gain is clearly the alleviation of another's pain.

This post is the second in a series of three posts. See also "Nine Spades are a Lump of Leets."

On the Research Front: Dolphins Let Each Other Finish Their Sentences

Researchers at the Karadag Nature Reserve, in Feodosia, Ukraine, recorded two Black Sea bottlenose dolphins, called Yasha and Yana, talking to each other in a pool. They found that each dolphin would listen to a sentence of pulses without interruption, before replying.
Amazing.  But I wonder if dolphins in New York would do this.

(Hat tip, Yves Smith.)

Tuesday, September 20, 2016

It Is Monday, And The Washington Post Is Saying Dumb Things About Foreign Policy As Well As Economics

(Well, Monday is now over, but... ) Yes, Robert J. Samuelson has a column about the Fed that ignores austerity fiscal  policies and other matters. But Dean Baker has done a good job tearing him and that to shreds over on Beat the Press (sorry, no link, too lazy), so I shall stick to the foreign policy side.

That  comes from Jackson Diehl, whom I have never figured out why he has ever had any credibility with anybody, although I guess he talks to the usual set of neoconnish VSPs that lurk  about Washington repeating increasingly empty and silly bromides to each other.  In this case it is about Syria,  with Diehl spouting stuff that Hillary apparently somewhat believed and supported when she was SecState, but appears to  have moved beyond to be closer to  the Obama admin's positions.  However, it may be that the point of this column is precisely to drag her back to things she once believed and supported, even as they are lying in tatters on the floor.

Diehl argues that Putin has taught Obama a "lesson" by upping his bombing and other military activities somewhat successfully in favor of the Assad government.  This supposedly shows that Obama was wrong to resist requests for more use of air power  that came from Kerry, Clinton, Petraeus, and Panetta, that unrealisticallly wimpy non-VSP prez.  If we had used more air power or otherwise "supported rebels" with no-fly zones more back in 2012 or so, we could have maybe attained a "political settlement favorable  to the United States and its allies."  This nonsense raises so many red flags, one almost does not know where to begin, but so we must.

Of course, one place to start is precisely that we have been supporting "the rebels," those favored by this group being some based mostly in northwestern Syria whom we have claimed were  "democratic moderates," but who have  long ceased to be that and to be dominated by al Qaeda-related groups. That has not kept us from supporting them, even if we never  instituted the no-fly zone this gang wanted, and that Hillary has quite recently claimed to still support (ugh). These folks  argue that if we had done this  back then, those virtuous democratic forces, supposedly derived from the original peaceful  anti-Assad demonstraters during the beginning of the 2011 Arab Spring, whom he crushed by attacking them with bombs and other military stuff, they would have just done peachy keen and taken power or something.  Anyway, supporting these mostly Sunni fundamentalist anti-Assad groups would please our "allies"(presumably Turkey and Saudi  Arabia, both of whom have become oppressive and engaging in unwise actions we should not support).  But the important thing has been to  overthrow Assad and put in place one or another of these groups, apparently not all that worried that they might be al Qaeda affiliated.

As it is, we have for some time in fact been both heavily bombing Syria and putting troops on the ground there more recently than 2012, namely against the group we have for several years considered to  be our Number One enemy in the world, Daesh/ISIL/ISIS/IS, whose caliphate's capital, al-Raqqa, is in eastern Syria. Our bombings have been directed against them and in support of Kurds of the leftist YPG, with whom around 300 US special forces are supposedly embedded, some of them reportedly wearing hammers and sickles on their uniforms.  This group had until very recently been advancing well and taking territory, with Obama and others reasonably arguing that they seemed to be the only group around interested in actually fighting Daesh.  Somehow, Diehl makes zero mention of any of this, although this clearly very important, especially now.  But they were poised to move on al Raqqa.

So where does Diehl get his argument about Putin?  Yes, Putin has increased aerial bombardments on various fronts, especially in the northwest against some of these al Qaeda linked groups we continue to  support (apparently mostly through the CIA, although I do not know that for sure).  Turkey was supporting these groups, while it does not like the Kurdish groups, whom it sees as allied with troublesome Kurdish groups in southeastern Turkey. In various parts of Syria, this bombing has worked to help Assad forces gain back territory and solidify its hold on power. These VSPs all of course think this is awful, and certainly Assad has been awful, supposedly killing up to half a million people.  But his regime does practice religious tolerance and support of the many ethnic minorities in Syria against a possible dictatorship by extremist Sunni Arabs, even if once there were some "moderates" and "democrats" in their midst.  Of course Diehl is right about Putin, and he goes on to say that Putin has done this  without "getting into a quagmire."  How nice.

But there is this minor detail  that he  fails to mention: Russia and the USSR before  have had a naval  base in Syria at Tartus since 1971.  They have been deeply involved in Syria for a long time and preserving that strategic hold has been a top priority for nearly half a century.  They also have an air base, so it is not surprising that they can easily increase use of air power in Syria without getting into  a quagmire  beyond their long historical presence, which we do not have at all.  Our situations are completely and totally different, and we are not  in alliance with the government in power  either, as they are.  That this might make comparing what Putin does with what Obama does completely irrelevant and ridiculous does not cross the consciousness of  Diehl.

Of course the more recent situation has indeed become completely absurd, which Diehl  does not discuss at all either.  He makes it seem we have not  supported those "moderates" in the northwest, (whom we should have supported more!),  But, they have morphed into the Syrian Free Army, whom ironically have come to be supported  not only by the US CIA but by Turkey and Russia.  Just as the US-Pentagon-backed Kurds were about to make their  move on al Raqqa, ah ha! Daesh gets saved by our CIA backed cavalry, the Syrian Free Army, which has swept in to block them and take territory from them, with the backing of  Turkey especially important who wants to block the Kurds and who has newly made friends again with Putin, thus accepting that maybe it  is OK to let the Assad regime survive.  So we have reached a  situation where we have US backed forces fighting US backed forces, but Diehl and his sources think  we should have gotten in even more deeply than we are.  I mean, heck, this is no quagmire...

Barkley Rosser

Monday, September 19, 2016

Nine Spades Are a Lump of Leets

The section on capital from Joan Robinson's 1970 review of Charles Ferguson's The Neoclassical Theory of Production and Distribution employs the "lump of leets" motif to highlight a key issue in the Cambridge critique of neoclassical capital theory. Robinson's substantive lump-of-leets critique offers an instructive contrast to the abject flimsiness of the proverbial lump-of-labor fallacy claims.

For some years they remained cooped up in this position, repelling all attacks with blank misunderstanding. Then, growing bold, they descended to the plains and tried to prove Sraffa wrong. ...

Sunday, September 18, 2016

Why Are the Big Banks Not Safer?

Larry Summers and Natasha Sarin report:
Since the financial crisis, there have been major changes in the regulation of large financial institutions directed at reducing their risk. Measures of regulatory capital have substantially increased; leverage ratios have been reduced; and stress testing has sought to further assure safety by raising levels of capital and reducing risk taking. Standard financial theories would predict that such changes would lead to substantial declines in financial market measures of risk. For major institutions in the United States and around the world and midsized institutions in the United States, we test this proposition using information on stock price volatility, option-based estimates of future volatility, beta, credit default swaps, earnings-price ratios, and preferred stock yields. To our surprise, we find that financial market information provides little support for the view that major institutions are significantly safer than they were before the crisis and some support for the notion that risks have actually increased. This does not make a case against the regulatory approaches that have been pursued, but does caution against complacency.
The authors highlight the equity betas for Bank of America, Citigroup, Goldman Sachs, JP Morgan, Morgan Stanley, and Wells Fargo which averaged 1.23 in 2015 and averaged only 1.18 before the crisis. If these banks were holding more equity relative to assets, we would expect a decline in these betas. But the authors also note that the average equity to asset ratio fell from 13% to 10%. Let’s break this out into leverage risk (which appears to have increased) and operational risk by estimating the average unlevered beta coefficient which appears to have fallen from around 0.15 before the crisis to 0.12 now. So is the real issue here that we are not requiring the big banks to hold more equity? Yes I know that these banks will protest that higher capital requirements will allegedly increase the cost of capital but this claim is inconsistent with basic finance as Anat R. Admati, Peter M. DeMarzo, Martin F. Hellwig, and Paul Pfleiderer note:
Whereas equity, because it is riskier, has a higher required return than debt, it does not follow that the use of more equity in the funding mix increases the overall funding cost of banks. Using more equity in the mix lowers the riskiness of the equity (and perhaps also of debt or other securities that are used in the mix). Unless securities are mispriced, simply rearranging how risk is borne by different investors does not by itself affect funding costs. These observations constitute some of the most basic insights in corporate finance.

Saturday, September 17, 2016

Racism Cancellation

Here is a metaphor to think about.  One common response to the problem of racism is to call for colorblind language and policy.  Don’t even think about race, much less talk about it.  Eliminate all programs that call attention to it.  Move immediately into a post-racial world by treating everyone without regard for race.

So think of racism as a kind of noise, a kind we want to get rid of.  How do you get rid of actual, nonmetaphorical noise with a set of headphones?  You can try to use isolation alone, blocking out all external sounds.  This could work, maybe, but it’s extremely difficult to do, especially if external noises are loud, and it’s impractical because there are also sounds out there we want to hear.  So we might use noise-cancelling headphones.  These work not simply by blocking sounds but also deliberately offsetting them, generating corrections that are out of phase with the noise we want to eliminate.

Racism cancelling works the same way.  It uses policies that take note of race but which are out of phase; where the racism “wave” crests, deliberately give it a trough.  Give extra consideration to candidates who typically get less because of racial bias.  Give extra resources to individuals who, because of racial inequality, have fewer.  Pay more attention to the views of people whose views have historically been less listened to.  And so on.

This also works for other types of inequality, like gender.  Don’t ignore it, cancel it.

Thursday, September 15, 2016

Whither Agent-Based Macroeconomic Modeling?

Last week at this time I participated in a conference called "Economics, Economic Policies, Sustainable Economics in View of the Crisis." which took place at the Universita della Polytechnic in Ancona, Italy.  The main host was Mauro Gallegati, a prominent agent-based modeler, econophysicist, and more general complexity economist (also a sometime coauthor of mine).  It went on for three days with parallel session and most of the participants from Italy, although also from across Europe, including Russia, and beyond to such places as India and Australia.  The more well-known plenary speakers were Duncan Foley, Bruce Greenwald, Alan Kirman, David Colander, and me.  While there were papers on many subjects, including a bunch on ecological economics and sustainability, a very main focus was about macro modeling and how agent-based modeling (ABM)  relates to other kinds such as DSGE, VAR, and old reduced form many equation ISLM models, these latter three reportedly what get looked at seriously at the Fed and most other central banks.  A big question was given the problems with those and the hopes for ABMs, why are they not getting adopted as a fourth model in those settings or even a replacement for one of the others?

A conference in Italy is an especially appropriate place to raise these questions as it has been perhaps the world's center of ABMs, especially for macroeconomics, as well also being a major center for econphysics and complexity economics more generally.  Gallegati runs a group and his students have spread all over the country.  There is a major group in Milan led by Domenico Delli Gatti that often works with Gallegati's group (when they coauthor it is the "Gattis," with Gatti meaning "cat").  There is another group in Pisa, led by Giovanni Dosi, and another in Genoa led by Silvano Cincotti, with reps from all these groups (and some others from other countries) all there.

The situation may be seen by the group in Genoa, where the group developed the EURACE model, which Cincotti spoke, on, perhaps the most widely studied and used macro ABM there is.  He used it to show how increasing the Basel Accord capital requirements on banks could increase financial fragility in the system, a good ABM kind of result not al that easy to get from other kinds of models and certainly very macro and central banky.  It involved agents moving into the shadow banking sector, with some unsurprising results.

The cynic in me says that they did that model to try to lobby against stricter EU requirements on the Italian banking system, which is very fragile and near collapse.  The borderline bank is Monte dei Paschi di Siena, the world's oldest bank, dating from the 1400s, which has a fabulous Renaissance art collection based on pieces given to them as collateral from debtors who failed. More generally the Italian economy seems to be stagnant, going along, without people looking miserable in the streets or whatever, although I noticed some places closed that used to be open in Ancona.  The most romantic is an old hotel, the Roma e Pace, which hired Joseph Stalin in around 1906 as a doorman, but then fired him for being "troppo timido," (too timid), what a hoot.  They had a newspaper article in their lobby on that, but cannot see it anymore.  Gallegati also said that Mussolini had an affair there at one point with a famous Italian actress.  Oh well.

Anyway, there are these pretty interesting ABMs out there that seem to be able to do interesting stuff, but somehow they are not being picked up by the central banks.  Furthermore, I heard rumors that funding from the EU and INET and some other places may be cut for this kind of research.  If this turns out to be the case, I think it will be too bad.  In the end, it may be that the rival that is holding it off is not DSGE, which everybody dumped on at the conference, but the much less visible but still used old ISLM ones. This might make Paul Krugman glad. Atheortical VARs just seem to be too useful for very short term forecasting to get kicked aside.

There were other interesting debates, between Foley and Kirman and me over general equilibrium theory (with an eye to DSGE applications) and between Colander and Kirman over spontaneous self-organization, this arising from the recent article in the JEL by Kirman about Colander's recent book on Complexity and Public Policy.  Kirman really slammed spontancous self-organization, much pushed by Hayekian Austrians, but Colander pushed back enough that Alan actually said, "Well, maybe I need to get reorganized."

Anyway, I think there is still potential for macro ABMs, so will be sad and frustrated if the flow of money to study these does get shut down.  It will look like a major triumph for the mainstream establishment after all the hullabaloo over the huge crash that happened eight years ago in just a few days.  We should have learned more.

Barkley Rosser