Monday, February 19, 2018

Shorting China

I just saw “The China Hustle” as part of the Portland International Film Festival.  It’s a very (very) slick documentary about the listing of fraudulent Chinese companies on US exchanges during the post-financial crisis era.  The companies were mostly real, but their financial data were fictitious, although given the stamp of approval by the SEC, investment banks, specialty law firms and the big four accounting firms.  The movie might be called “The Medium Size Short” because it centers on several market players that have righteously fought this upwards-of-$50 billion fraud by shorting it.

I think it does a great job of explaining the financial mechanisms at work (especially the short itself), and it holds your attention with lots of jump-cutting, extreme facial closeups, brightly lit à la Errol Morris, and the other techniques of zingy video journalism.  It would make a great classroom enhancer in courses on finance or political economy, provided you’ve got a 90-minute block of time to spare.

I have two qualms with the content.  First, it makes the case that the victims of this crime are the millions of small investors and pension-savers, people like you and me.  And it’s true that many pension funds and ordinary folks were ripped off.  But the real indictment is this: the financial sector has doubled its share of the economy, and its ballooning profits are a major contributor to the rise in inequality.  What are we paying for?  As this film clearly shows, we are definitely not buying better information or a more productive allocation of capital, at least not in the sectors of the market it shines its light on.  On the contrary.  We are being fleeced by sharp operators whose only reason for existence is that they can stash away their cut of the loot before anyone learns enough to stop them.  That’s a pretty big lesson, in my book.

Also, the film ends by suggesting that the entire market capitalization of the major Chinese firms—they point to Alibaba in particular—may be fraudulent, and that we’re on the verge of another 2008-style market meltdown.  I’m not a specialist in Chinese equities, so I won’t take a position on this.  Nevertheless, it’s clear that there is a lot of genuine economic growth going on in China, and some of it must be serving to support asset values.  It is unlikely that the entire capitalization of Chinese firms will prove to be as flimsy as that of the smaller pseudo-firms exposed in the film.  Of course, between full current market value and zero there’s a lot of potential space for unpleasant surprises.

Sunday, February 18, 2018

A Critical Review of Jeffrey Miron’s Call to Slash Entitlements

I accused John Cochrane of incoherent babbling on the Federal deficit issue noting his update where he flip flopped:
He went from fiscal policy being sober to we are in dire straights just like that! Oh my the sky is falling. We have to take away those Social Security benefits that my generation have been paying into for 35 years. We cannot afford Federal health care spending. After all those tax cuts for the rich can never be reversed. Yes John Cochrane is part of the Starve the Beast crowd even if granny starves from these supposedly required reductions in transfer payments.
But let’s note why Cochrane flip flopped in his update:
Jeff Miron wrote to chide me gently for apparently implying the opposite, which is certainly not my intent. One graph from his excellent "US Fiscal Imbalance Over Time".
Having read this Cato paper, it is time for my critical review that I promised. The review will start with the technical finance which in one way is a lot better than Cochrane’s rants but still troubling in certain ways. I will next turn to the policy if not political issues where this paper is even worse than Cochrane’s update. Beware – we will have to cover a fair amount of numbers but I hope to keep this within the context of my present value model:
Let g = the ratio of Federal expenditures excluding interest payments to GDP and t = the ratio of Federal taxes to GDP. If we assume a steady state model, the present value of future primary surplus is simply V = (t- g)/(r – n), where r = the real interest rate and n = the long-term growth rate. As long as V is at least as great as the debt/GDP ratio, we are not on the bankruptcy path that economists were talking about when Reagan initiated his 1981 fiscal fiasco. Tax rates were massively cut and defense spending spiked and had this fiscal stance continued forever, then the debt/GDP ratio would have exploded. Of course it didn’t as there were future tax increases and the peace dividend.
Miron is using the same basic model, which he expresses as:
Fiscal Imbalance = Present Value of Future Expenditure – Present Value of Future Revenue + Outstanding Debt
What I like about this equation is its focus on future spending and revenue not historical decisions which can be summarized as the current level of debt in terms of our model. Cochrane’s rant was a bit weak in this regard. May I suggest Cochrane rent the 1989 movie and check out this scene as the Joker gets basic finance! While I may quibble with Miron with respect to his forecasts, my big problem the use of nominal figures to draw his graph – which is far from “excellent”. Note his measure doubled in nominal terms since 2000 but so has nominal GDP (higher prices, more people, and higher income per person). Which is why this title and introduction is misleading:
U.S. Fiscal Imbalance over Time: This Time Is Different. The U.S. fiscal imbalance—the excess of what we expect to spend, including repayment of our debt, over what government expects to receive in revenue—is large and growing.
Evsey Domar introduced “The Burden of Debt” in 1944 by expressing everything as a percentage of GDP. While his approach was first order differential equations, our present value approach done properly is easier to follow and perhaps more policy relevant. But let’s be clear – Domar was trying to figure out how high tax rates needed to be to cover past fiscal decisions captured in the debt/GDP plus the present value of expected future government spending. We will return to the policy implications of this shortly. Back to Cochrane’s ranting:
The US fiscal situation is dire. The debt is now $20 trillion, larger as a fraction of GDP than any time since the end of WWII. Moreover, the promises our government has made to social security, medicare, medicaid, pensions and other entitlement programs far exceeds any projection of revenue.
Could he have admitted that nominal GDP now is about twice that of the circa $10 billion per year level in 2000? Back then the debt to GDP ratio was 54% while it is 104% now. Back then the nominal interest cost was 3.5% of GDP which is the same ratio as it is now. Yes the debt ratio has almost doubled but we see both lower inflation rates as well as lower real interest rate. One the things that might puzzle you is how Cochrane paints 2000 as a period of large primary surpluses whereas Miron suggests it was a period of fiscal imbalance. This is where forecasting comes in as it might be naïve to assume that the current levels of g and t are good means for forecasting the future. But before we get into the forecasting which involves politics, let’s talk a bit about r and n by going back and poking a little fun at DOW 36000:
Imagine the whole U.S. corporate sector as if it were a single company. And imagine that this company - and the economy - will grow steadily forever, say at 5 percent nominal (3 percent real plus 2 percent inflation). Suppose also that the interest rate is 6 percent. What is this company worth? The answer should be that it is worth 100 times dividends.
Krugman was assuming real growth = 3% and a real interest rate = 4% back in 2000. Sounds about right for then but I would lower both of these by 1% for today. In either case, the present value of a primary surplus would be 100 times the current surplus in a steady state model. In other words, we would have needed a primary surplus equal to 0.55% of GDP back then but now we would need a primary surplus equal to 1.05% of GDP now. Permit me to quibble a bit with Miron’s assumptions:
I create projections for real GDP, starting in 1965 and going forward as far as necessary. Those projections are calculated by taking actual real GDP in 1965, followed by 2.55 percent growth every year thereafter….All present values assume a real interest rate of 3.22 percent, which equals the average real interest rate on 30-year long-term government bonds in the United States over the past four decades.
Historical averages do not strike me as a reasonable approach to forecasting future long-term growth or interest rates. But this is just a quibble as we are not that far off in terms of our denominator (r – g) so let’s focus on the numerator that is expected cash flows. As I noted:
In 2017, g was 19.5% and t was 18.5% so maybe we should be more concerned especially since we have had another tax cut for the rich as well as a call for a larger defense budget.
Back in 2000 government spending including interest rates was only 19.5% so government spending excluding interest rates excluding interest rates was only 16%. Government revenues exceeded 20% of GDP. If these ratios were expected to continue forever, then one might get Alan Greenspan’s concern that we might pay off the national debt very quickly. Of course we did not and Miron suggests we should have known that government spending would rise over time. Glassman and Hassett’s glaring error in many ways was to have a very stupid model of expected cash flows as they pretended cash flows equal profits even as a firm has to invest some of its profits for new capital in a growing economy. And to think Hassett is now heads the CEA! Miron may be better at forecasting but we need to think about the politics of what he is arguing:
As of 2014, the fiscal imbalance stands at $117.9 trillion, with few signs of future improvement even if GDP growth accelerates or tax revenues increase relative to historic norms. Thus the only viable way to restore fiscal balance is to scale back mandatory spending policies, particularly on large health care programs such as Medicare, Medicaid, and the Affordable Care Act (ACA)… Despite widespread agreement that spending or tax policies must change, however, appropriate adjustments have so far not occurred. Indeed, many recent policy changes have worsened the U.S. fiscal situation. These changes include the creation of Medicare Part D ($65 billion in 2014), new subsidies under the Affordable Care Act ($13.7 billion in 2014), the expansion of Medicaid under the ACA (from $250.9 billion in 2009 to $301.5 billion in 2014), higher defense spending (from $348.46 billion in 2002 to $603.46 billion in 2014), increased spending on veterans’ benefits and services (from $70.4 billion in 2006 to $161.2 billion in 2014), and greater spending on energy programs (average annual spending was $0.52 billion over 1998–2002 but $11.43 billion over 2010–2014).
I’m not a big fan of using terms like mandatory versus discretionary spending preferring to look at defense purchases, nondefense purchases, Social Security payments, and health care benefits. Miron’s figure 9 shows Social Security benefits have risen to 5% of GDP but we knew this would happen back in 1983 when Greenspan chaired Reagan’s Social Security reform commission which led to a large increase in the payroll tax to prefund the Social Security Trust Fund. I guess Greenspan in 2001 had forgotten the notion to “think about the future” that so ably guided him in 1983. Paul Ryan and President Trump at times tells us that they do not want to take away the Social Security benefits that my generation has been paying for since we entered the workforce. Miron also notes:
Defense spending averaged 8.4 percent of GDP in the 1960s, 5.6 percent in the 1970s, 5.6 percent in the 1980s, 3.8 percent in the 1990s, 3.7 percent in the 2000s, and 4.2 percent in the past four years.
While the defense spending/GDP ratio fell below 4% at the end of Obama’s second term, Mitt Romney promised to keep at above 4% had he and Paul Ryan been elected in 2012. Which is odd since Ryan told us that total Federal purchases (defense and nondefense) would be limited to only 3.5% of GDP. President Trump has promised a large increase in defense spending so let’s get more realistic about nondefense purchases than the Ryan promise to run the rest of the Federal government on a budget of negative 0.5% of GDP. Nondefense purchases rose from 2.34% of GDP in 2000 to 3% of GDP in 2011 before falling back to 2.66% of GDP in 2017. While it is true that Trump wants to cut this ratio a bit, he has also promised to fixed the underinvestment in infrastructure . William Galston is not impressed with the Trump proposal:
But there is a void at the core of the administration’s plan: funding. Not only does the administration not specify where it will find the additional $200 billion of direct spending it calls for over the next decade, but also it makes what most experts regard as wildly unrealistic assumptions about the amount of state, local, and private funding this modest increment will spark. Although the word “leverage” is sprinkled liberally throughout the plan, hardly anyone believes that $200 billion federal dollars will produce an additional $1.3 trillion investment from non-federal sources, especially when state and local budgets are being squeezed by rising costs for education and health care.
Privatizing our toll roads was one fiscal trick used by certain states but that turned out to make their long-term financing worse, while their roads will likely be poorly maintained. States could pick up the tab if state taxes are raised in lieu of higher Federal taxes. Or are conservatives saying we should cut education spending as well as police protection? Speaking of healthcare, let’s return to Miron:
even projections that incorporate less rapid health care cost inflation still show Medicare and other health care expenditure growing faster than GDP by enough to make fiscal imbalance large…the main drivers of America’s fiscal deterioration appear to be the ever-growing costs associated with Medicare, Medicaid, and other health programs. Whereas Social Security has accounted for a relatively constant share of expenditure in proportion to GDP, Medicare and Medicaid costs have been growing as a ratio of GDP for the past four decades. This growth is what makes the country’s fiscal path unsustainable.
OMG – Federal spending on health care is out of control! Well no. We earlier discussed the implications of Baumol’s Cost Disease for relative prices of certain services nothing this from Timothy Lee:
Most of federal and state budgets are spent on services — law enforcement, education, health care, the courts, and so forth — that are subject to Baumol’s cost disease. Government spending on these categories has grown inexorably in recent decades, and many conservatives see this as a sign that there’s something badly wrong with how the government provides these services. But Baumol’s work suggests another explanation: It was simply inevitable that these services would get more expensive over time, at least relative to private sector manufactured goods like televisions and cars. The rising cost of services is an unavoidable side effect of rising affluence generally. There’s probably no way to maintain our current standard of living while cutting the cost of these services back to the levels of the 1950s.
During the 2012 campaign both Obama and Paul Ryan had plans to reign in the growth of Medicare spending with Ryan wanting to cut benefits to people leaving the obscene profits of the providers untouched as opposed to Obama wanting to expand benefits but reigning in this market power. But let’s be clear – we will spend as a nation more on health care as a share of GDP. The policy question is who pays for it. Ryan’s proposals on Medicaid are akin to Trump’s on infrastructure – force this burden on state governments and if they do not choose to raise their taxes, let the private sector pick up the slack. On both issues, the private sector does a poor job of providing services equitably. If we want an honest debate on fiscal policy these discussions from Cochrane and Miron fall miserably short in their arbitrary rejection of the possibility that we cannot raise taxes as a share of GDP. Let’s add that if the fiscal situation was so dire – why were conservative economists so eager to reduce taxes on the rich? And do not peddle that Laffer canard that reducing the national savings rate will lead to some growth miracle.

Friday, February 16, 2018

Fiscal Stability or Dire Straights: John Cochrane’s Latest Rant

At times John Cochrane babbles on incoherently on what should be a straight forward issue. This post is one example:
Once you net out interest costs, it is interesting how sober US fiscal policy actually has been over the years. In economic good times, we run primary surpluses. The impression that the US is always running deficits is primarily because of interest costs. Even the notorious "Reagan deficits" were primarily payments, occasioned by the huge spike in interest rates, on outstanding debt. On a tax minus expenditure basis, not much unusual was going on especially considering it was the bottom of the (then) worst recession since WWII. Only in the extreme of 1976, 1982, and 2002, in with steep recessions and in the later case war did we touch any primary deficits, and then pretty swiftly returned to surpluses.
I too advocate looking at the primary surplus. Cochrane is a finance professor so let’s make this simple. Let g = the ratio of Federal expenditures excluding interest payments to GDP and t = the ratio of Federal taxes to GDP. If we assume a steady state model, the present value of future primary surplus is simply V = (t- g)/(r – n), where r = the real interest rate and n = the long-term growth rate. As long as V is at least as great as the debt/GDP ratio, we are not on the bankruptcy path that economists were talking about when Reagan initiated his 1981 fiscal fiasco. Tax rates were massively cut and defense spending spiked and had this fiscal stance continued forever, then the debt/GDP ratio would have exploded. Of course it didn’t as there were future tax increases and the peace dividend. Cochrane takes us through the Great Recession:
Until 2008. The last 10 years really have been an anomaly in US fiscal policy. One may say that the huge recession demanded huge fiscal stimulus, or one may think $10 trillion in debt was wasted. In either case, what we just went through was huge. And in the last data point, 2017, we are sliding again into territory only seen in severe recessions. That too is unusual.
The Great Recession did demand huge fiscal stimulus – we got a tempered version of what was really needed. The last decade has taken the debt/GDP ratio to 100% but we have returned to near full employment so I do not get his 2 last sentences quoted. In 2017, g was 19.5% and t was 18.5% so maybe we should be more concerned especially since we have had another tax cut for the rich as well as a call for a larger defense budget. But then comes his update!
“The US fiscal situation is dire. The debt is now $20 trillion, larger as a fraction of GDP than any time since the end of WWII. Moreover, the promises our government has made to social security, medicare, medicaid, pensions and other entitlement programs far exceeds any projection of revenue.”
He went from fiscal policy being sober to we are in dire straights just like that! Oh my the sky is falling. We have to take away those Social Security benefits that my generation have been paying into for 35 years. We cannot afford Federal health care spending. After all those tax cuts for the rich can never be reversed. Yes John Cochrane is part of the Starve the Beast crowd even if granny starves from these supposedly required reductions in transfer payments. Give me a break!

All Economists Are Bastards -- Except Us

Peter Frase has a very interesting post up about the role of popular culture in legitimizing the police. Frase recounted a forum he attended with Alex Vitale  talking about his book, The End of Policing. In response to a question about why people believe that the function of policing is to maintain peace in the liberal order when its actual practice and history suggest otherwise, Vitale cited television cop shows like  as "a relentless machine for producing and reproducing the legitimacy of policing in the public mind."

This is what called to Frase's mind the perpetual plot line he calls "'ACAB-EU': All Cops Are Bastards, Except Us.":
The trope works by consistently portraying its central characters as liberal fantasies of the good cop–whether it’s the pseudo-scientists of CSI, the workaday victim-protectors of SVU, or the magical profiler-geniuses of Criminal Minds. At the same time, it makes a seeming concession to concerns about police misconduct, by constantly putting its protagonists in conflict with "bad cops" and their enablers, whether it be a rapist Corrections Officer or a corrupt small town department whose cover-up leads all the way to the Governor.
 Of course this trope works for politicians too. And economists.

Thursday, February 15, 2018

Rumble on Wall St. -- No Other Way of Keeping Profits Up!

At Jacobin, Seth Ackerman did an interview with J.W. Mason about The Class Struggle on Wall Street that considers the trade-off between relative profit and wage shares of income. Whether you agree with his analysis or not, Josh teases out some of the implications of the relationship, both for profit expectations and for political prospects.

One assertion I would question is "there is absolutely no reason to expect an uptick in inflation." Well, yes, no one expects the Spanish Inquisition, either. While there may indeed be no reason to expect inflation, inflation's chief weapon is surprise... surprise and fear... and ruthless efficiency,

And this is also why I think it would be impossible to empirically confirm Egmont Kakarot-Handtke's "law" of profit. There is no "real" yardstick with which to measure aggregate profit. If Egmont is right that "[m]acroeconomic profit depends in the most elementary case alone on deficit spending, that is, on the change of private or public debt," then he is wrong that his profit "law" can be tested empirically and "will be confirmed without exception."

Josh Mason also talks about the "tightrope we have to walk" in thinking about the relationships between profits, wages, inflation and productivity. Not only is the rope tight, it is also tied in knots with "inflation" and "productivity" referring to ratios between incomes, costs and outputs. Egmont's theory reminds us of yet another tightrope -- the tightrope central bank authorities must walk between inflating the money supply through the expansion of credit and persuading the public that such inflation is not inflationary.

The conventional persuader is unemployment. One doesn't have to subscribe to the NAIRU doctrine that insufficient unemployment accelerates inflation to concede that policy-induced unemployment tips the scales against wage increases and thus insulates the profit share of income from the latent inflationary consequences of credit expansion. Yes, the trick here is how to sustain compound profit inflation without accelerating price inflation! How to debase the coin of the realm without debasing the coin of the realm. It's a beauty contest.

There is, after all, no other way of keeping profits up!

Baumol Cost Disease and Relative Prices – Part 2

Many thanks to the Angrybear for reposting this as well as some excellent comments (save that absurd contention I’m a Luddite). If you check the comments over at Mark Perry’s place you will see that Paul Wynn made the same point I made and even linked to Timothy Lee:
This became known as Baumol’s cost disease, and Baumol realized that it had implications far beyond the arts. It implies that in a world of rapid technological progress, we should expect the cost of manufactured goods — cars, smartphones, T-shirts, bananas, and so forth — to fall, while the cost of labor-intensive services — schooling, health care, child care, haircuts, fitness coaching, legal services, and so forth — to rise. And this is exactly what the data shows. Decade after decade, health care and education have gotten more expensive while the price of clothing, cars, furniture, toys, and other manufactured goods has gone down relative to the overall inflation rate — exactly the pattern Baumol predicted a half-century ago… this has an important implication for government policy. Most of federal and state budgets are spent on services — law enforcement, education, health care, the courts, and so forth — that are subject to Baumol’s cost disease. Government spending on these categories has grown inexorably in recent decades, and many conservatives see this as a sign that there’s something badly wrong with how the government provides these services. But Baumol’s work suggests another explanation: It was simply inevitable that these services would get more expensive over time, at least relative to private sector manufactured goods like televisions and cars. The rising cost of services is an unavoidable side effect of rising affluence generally. There’s probably no way to maintain our current standard of living while cutting the cost of these services back to the levels of the 1950s.
Lee wrote this back on May 4 and included the same graph that Mark Perry presented.

Wednesday, February 14, 2018

No Other Way of Keeping Profits Up

"There is no other way of keeping profits up, but by keeping wages down." -- David Ricardo

Tuesday, February 13, 2018

Drastically Changing the Rules On Infrastructure Spending

Most observers have figured out that the Trump infrastructure spending plan seems to be weirdly lopsided in an unrealistic way, with $200 billion in federal spending somehow supposed to inspire a total of $1.5 trillion in spending by state and local sources along with private ones.  What has not been made all that clear publicly is how this plan upends decades of established practice in fiscal relations between the federal and the state and local governments.  The long-established formula has been 8 to 2, that is $8 in federal money for $2 in state or local money in infrastructure construction projects.  Trump's plan proposes to completely reverse this to a 2 to 8 formula, $2 in federal money for $8 in state or local money.  Anyone who thinks this is going to provide any actual infrastructure activity that would not have otherwise is simply completely delusional.

Of course it is well known that the private sector input will involve tolls or other payment methods to make sure the private interests make a positive rate of return. One important area many want to see work done is on fixing bridges. The American Society of Engineers has identified about 50,000 bridges in the nation that need repair.  However rhey also estimate that only about 100 of those are reasonably suitable for private tolling.  This is another not-going-anywhere part of the proposal.

However, Trump is apparently hoping to raise money by outright selling off some publicly owned infrastructure assets.  The Washington Post reports today that in the Washington area this includes the two main airports, Dulles and Reagan National, as well as the George Washington Memorial Parkway (currently not tolled).  I can hardly wait and am curious what else around the country is going to be put on the block for a grand fire sale leading to all kinds of tolls and other nonsense.

Barkley Rosser

Mark Perry Has Never Heard of William Baumol

Otherwise why would he write this nonsense:
The chart above (thanks to Olivier Ballou) is an update of a chart we produced last year about this time, and shows the percent changes since January 1997 in the prices of selected consumer goods and services, along with the increase in average hourly earnings in this version … Blue lines = prices subject to free market forces. Red lines = prices subject to regulatory capture by government. Food and drink is debatable either way. Conclusion: remind me why socialism is so great again.
The reason that prices of certain services have risen relative to the price of manufactured goods is socialism? There could be no other explanation. I guess Perry has never heard of William Baumol’s cost disease:
The example Baumol and the late William G. Bowen made famous is that of the string quartet. The number of musicians and the amount of time needed to play a Beethoven string quartet for a live audience hasn’t changed in centuries, yet today’s musicians make more than Beethoven-era wages. They argued that because the quartet needs its four musicians as much as a semiconductor company needs assembly workers, the group must raise wages to keep talent—to keep its cellist from chucking a career in music and going into a better-paying job instead. The effect now known as Baumol’s Cost Disease is used to explain why prices for the services offered by people-dependent professions with low productivity growth—such as (arguably) education, health care, and the arts—keep going up, even though the amount of goods and services each worker in those industries generates hasn’t necessarily done the same.

Monday, February 12, 2018

The WaPo Gang Going After The Usual Suspects On the Budget Falls On Its Face Factually

All right, all right, that is not completely fair.  Yes, they dump all over Trump and the GOP-run Congress for their massive tax cut directed at the rich, as well as the hypocrisy of the Republicans in so smoothly switching from denouncing budget deficits during the Obama era to a "what? me worry?" attitude now with deficits set to soar in a period of near full employment.  But, of course, the Monday gang at the Washington Post simply cannot avoid making a big deal about somehow "entitlements" are not being cut, although all kinds of other areas are going up, especially defense.  But they just cannot get off this schtick.

I note that Dean Baker has just posted a whole bunch of comments on the newly proposed budget, as well as the recent tax cut, including one focusing on the WaPo gang and their annoying commentaries.  However, I hope to add here some points he does not make.  I am largely in agreement with his posts, with only minor disagreements not worth bothering with here.

Curiously, the usually more annoying WaPo editorial page editor, Fred Hiatt, was less annoying than the usual WaPo Monday economics commentator, Robert J. Samuelson.  Of course, Hiatt mourned that in 2012 and 2013 Obama and Boehner could not agree on "tax hikes and entitlement cuts."  Quite aside from this annoying terminology of "entitlements," there simply was never any good reason for cutting Social Security, Medicare, or Medicaid, at least not directly.  As has been pointed out by many of us from well before then and up to the current time, especially Dean Baker, cuts could have been made, but the way to  do it was to get the wildly high US medical care costs under control in general, which would show up in reductions of Medicare and Medicaid spending, without any loss in quality in care, assuming things were to be managed reasonably.  But Hiatt and crew simply never recognize that. It is just how irresponsible all these politicians are or not just cut cut cutting those darned entitlements, although preferably in conjunction with that very unlikely to happen tax increase.  As noted already, while Hiatt nods at dumping on Dems for supporting some spending increases (not noting that some of them such as disaster relief are really needed), he spends most of his fire dumping on Trump and the GOPsters for their deficit hypocrisy.

However, Samuelson puts on one of his classic performances, indeed worse than usual.  Yes, he does plenty of bashing on the GOP tax cut, but he seems to justify the GOP-pushed increase in military spending (plus $80 billion, the largest increase of any item).  According to RJS, "On defense, President Obama's budgets reduced readiness, left the services too small and made it harder to counter new technological threats, notably cyberwarfare." Really?  The US has bases in 70 nations and special forces in at least 122.  Do we need all that, not to mention that our military spending exceeds the sum of all that going on in the next five or so nations' spending?  I almost do not even know what more to say about this item.

But then when it comes to his specialty, demanding cuts in those darned entitlements, he falls on his face by making outright factual misstatements as near as I can tell.  He starts out with a claim that "so-called entitlement programs...were largely untouched. They represent 70 percent of federal spending."  Oooops!  I checked this number, which I have seen elsewhere previously, and it seems to be fake news, too high.  Looking at 2018, "Pensions" are 25%, "Healthcare" is 28%.  Offhand that 53% should include the big three "entitlements."  If one adds "Welfare" there is another 8%, which puts it up to 61%.  But no matter how you slice it, RJS's 70% number is simply too high, unless one plays some game of simply ignoring some other categories of spending.  RJS really should be above this sort of thing.  And that percentage is not going to rise in 2019 given the big jump in defense spending going on.

There is one more blunder on his part that I find seriously annoying, especially how much reporting of the spending implications and outcomes from ACA have has gone on.  He declares, "Republicans congratulate themselves on new tax cuts; Democrats are always eager to increase social spending - witness the Affordable Care Act."  Ooooooops! yet again.  I double checked.  RJS seems to have forgotten that ACA was sold on actually saving money and it did.  From 2012-2017, the net savings from ACA is estimated at $84 billion.  That maybe not a huge number, but it is a saving that somehow RJS has to turn into an "increase social spending."  Really.  Did he do his homework at all or has he gotten so deep into his standard lines that he is simply dispensing fake news now?  I understand: fake news has simply taken over nearly everything in Washington, but  one would hope that the Washington Post would try to avoid such outright factual errors.

Barkley Rosser

Watch Out for Charlie Kirk's Treacle-Down Tart

"There's many a fly got stuck in there."

Who is Charlie Kirk? He is the 24-year old executive director and founder of Turning Point USA. Jane Meyer profiled the organization in the New Yorker in December:
Based outside of Chicago, Turning Point’s aim is to foment a political revolution on America’s college campuses, in part by funneling money into student government elections across the country to elect right-leaning candidates. But it is secretive about its funding and its donors, raising the prospect that “dark money” may now be shaping not just state and federal races but ones on campus.
A couple of weeks ago in The Baffler, Maximillian Alvarez described the tactics employed by TPUSA to harass and silence opposition to their "free market" totalitarianism. If you like Tomi Lahren, Sebastian Gorka, Donald Trump Jr. and Sean Hannity, you'll love Charlie Kirk.

Charlie Kirk is a Charlatan.

Last Friday, the Sandwichman posted Is the "Invisible Hand" a lump of labor? to EconoSpeak and Angry Bear. It received a little over 300 views on EconoSpeak and a total of three comments on both blogs. Charlie Kirk's twitter video on the "socialist myth of the 'fixed pie'" was tweeted three days earlier. It has so far received 3,300 "likes" and 1,688 comments.

Why Tax Cuts for Rich Dude Will Lead to Little Stimulus

Over at Brad DeLong’s blog jonny bakho adds an interesting comment:
How much stimulus did the GWBush tax cuts provide? They came during a recession followed by "jobless recovery" made somewhat better by the housing bubble, then burst big time in 2008. How different would the multiplier be if given to infrastructure repair and broadband extension, investments that create domestic jobs? In a global economy, tax cuts to the investor class are spent globally. Tax cuts for investors can theoretically speed the process of offshoring if most of the good investments are in foreign countries, a negative domestic stimulus. In a global economy, all "stimulus" is leaky. To be a truly domestic stimulus, tax cuts and spending must be carefully targeted. GOP tax cuts in 2001 and 2016 were both designed to enrich wealthy patrons, with little attention to targeting for domestic stimulus
For some reason I could not add to his comment there so I decided to post my thoughts here:
Make that the 2017 tax cut and add in the 2003 tax cut and I agree. First of all the marginal propensity to consume for rich dudes (MPC-rd) is likely quite modest and the impact effect = the tax cut for our rich dude times (MPC-rd minus his marginal propensity to import). If this rich dude takes his trophy wife to Rodeo Drive to spend $1800 on a Louis Vuitton bag – that bag was made in France.

Friday, February 9, 2018

Is the "Invisible Hand" a lump of labor?

The first premise of Adam Smith's famous metaphor about an "invisible hand" leading individuals to promote the public interest, although they intend only private gain, was that there is only so much work to go 'round. That is, Smith assumed there was a certain quantity of work to be done -- a "lump of labor." He didn't tacitly assume it -- he stated it plainly:
As the number of workmen that can be kept in employment by any particular person must bear a certain proportion to his capital, so the number of those that can be continually employed by all the members of a great society must bear a certain proportion to the whole capital of that society, and never can exceed that proportion.
Smith didn't present his invisible hand metaphor until six paragraphs later. But the argument about individuals promoting the public good in spite of seeking only private advantage is in the paragraph immediately following the above passage. The subsequent reference to an invisible hand merely emphasized and amplified the argument. Smith's premise about the proportion between the number of workers and the amount of capital defined, with minor modification, what came to be known as the wages-fund doctrine of classical political economy. Instead of the whole capital restricting the number of workers that could be employed, however, the wages-fund argument specified that it was only that portion of capital that consisted of wage-goods that imposed the limitation.

Few authors have noted the connection between the classical wages-fund doctrine and Smith's version of it. One was Henry Hoyt, who was governor of Pennsylvania from 1879 to 1883. In Protection versus Free Trade (1886), Hoyt credited Smith with having "laid down, as quite fundamental, this proposition… [as] one of the pillars of his free-trade system." He then categorized Smith's statement as a version of the wages-fund doctrine:
We shall see later on the essential vice of this statement as a statement of fact. It is not true that industry is limited by capital, and, as a matter of fact, there has never been any limitation on the employment of labor by reason of lack of capital. It is one mode of formulating the wages-fund theory.
Thirty years after Hoyt, Leopold Amery delivered a series of lectures in which he evaluated The Fallacies of Free Trade, paying particular attention to Smith's "terminological inexactitude." Smith's concept of capital viewed the capital of a nation as merely an aggregate of individual capitals. The difference, Amery explained, was that an individual's capital "is the result of saving, and grows by saving from profits or by credit based on profits" while the capital of a nation, "grows by the exercise of the qualities and energies of which it consists." In the jargon of systems dynamics, Smith mistook a stock for a flow.

Amery subsequently served as a conservative Member of Parliament from 1911 to 1945 and was best known for a Commons speech he gave in 1940, following the Allied retreat from Norway. In that speech he criticized the government's conduct of the campaign and concluded with a quotation from Oliver Cromwell, "You have sat too long for any good you have been doing lately. Depart, I say, and let us have done with you. In the name of God, go!" Three days later, after surviving a motion of no confidence with a greatly reduced majority, the Conservative government of Neville Chamberlain resigned.

As Hoyt had done, Amery identified Smith's error with the wages-fund doctrine but also with "its daughter fallacy," which he specified as "the restriction of output":
It is upon this confusion, upon this terminological inexactitude, that they have based their exposition of many a plausible and mischievous fallacy - the long since exploded "wages fund" theory for instance, with its enduring legacy of class hatred, and with its daughter fallacy, the restriction of output, a fallacy involving most harmful consequences to the prosperity of the working man…
In contrast to the wages-fund doctrine, which was boldly proclaimed by the champions of free trade and laissez faire, this so-called "daughter fallacy" -- also known as the "theory of the lump of labour" -- had no suitors.

This peculiar lack of utterance was sometimes noted by its detractors. James McCleary, who served in the U.S. House of Representatives from 1893 to 1907, claimed there was an "oft-repeated error" behind statements from union leaders made to the congressional committee on labor on which he sat. "It was rarely if ever put into words," McClary wrote in 1912, "but it was the unspoken major premise of many an attempted syllogism, the unstated basis of many an appeal." Half a century later, steel industry executive William Caples observed that the alleged fallacy was "one of the most tenaciously held and generally least articulated of trade union beliefs..." Least articulated by the trade unionists themselves, that is. Opponents of trade unionism never tired of attributing the belief to those who "rarely if ever" professed it.

McCleary's and Caples's perception of an absence of overt statement is confirmed by full-text searching of thousands upon thousands of historical documents, newspapers, pamphlets, books and journal articles using synonyms and cognate phrases for the proverbial fixed amount of work to be done. Up until the 1860s declarative statements of those phrases occurred exclusively in texts authored by political economists, propounding some version of the orthodox wages-fund doctrine. When trade union leaders or advocates used the phrases, it was invariably either with conditional if-clauses or in refutations of the claims of orthodox political economy.

In the 1860s and after a remarkable metamorphosis took place. Just as the wages-fund doctrine was being refuted, repudiated and recanted by economists, there emerged a chorus of remonstrance against what John Wilson in the Quarterly Review called a "Unionist reading of the Wage-fund theory." As usual, no evidence was given of unionists stating any such view, only indignant assertions.

Leo Amery's analysis of terminological inexactitude is useful here to help understand what is going on in the incongruous transformation from avowed principle to alleged error. The first step was to deploy, as Smith had done, an individualist concept of accumulated capital in place of a societal concept of exercised capacities – substituting the stock for the flow. The second step was to uphold this ideal of aggregate capital accumulation as the standard by which the workers' self-interest must be gauged. To attempt to restrict the accumulation of capital was thus denounced as delusional. This argument led to what Maurice Dobb later called "the apparent paradox that the more the workers allow themselves to be exploited, the more their aggregate earnings will increase (at least in the long run), even if the result is for the earnings of the propertied class to increase still faster." The illegitimate "daughter" was thus conceived entirely in the image of the banished father.

Let me try to explain that once more because the sleight of hand of the operation makes it difficult to follow what's going on. In order to allege the derivative restriction-of-output fallacy, the plaintiff needed both to commit AND to disavow the original wages-fund fallacy. This was accomplished by accepting both the “terminological inexactitude” and the conclusion of the original (social benefit from individuals pursuing self-interest) while failing to acknowledge the conclusion's disgraced premise (the number of workers proportionate to accumulated capital).

Even if we understand how the derivative fallacy claim works the question still remains, why is it widely persuasive? I would propose two parts of an answer to that question. First, regardless of the invalidity of its premises, there is a compelling kernel of truth in Smith's invisible hand metaphor. Actions that are wholly motivated by self-interest can, and often do, indeed have "unintended" social benefits. An avid gardener may care little about the pleasure the garden provides to neighbours and passers-by. Commerce certainly enables a wider and presumably preferable variety of commodities than would otherwise be available. On the other hand, the social costs of actions motivated wholly by self-interest may be diffuse and deferred and thus hard to trace.

The second reason is both an historical and a theological one. As such it can only be briefly alluded to here. Smith's fable is a theodicy of sorts. Instead of addressing the question of how there can be evil in the world if God is omniscient, omnipotent and good, it addressed the paradox of the persistence of poverty in the midst of plenty. The intellectual climate of the Enlightment was awash in rationalistic theodicies. The legacy of those intellectual pursuits during the emergence of supposedly secular political economy has been addressed elsewhere in depth, for example, by John Milbank in "Political Economy as Theodicy and Agonistics," by Michael Sonenscher in "Physiocracy as a Theodicy," and most recently by Joseph Vogl in The Spectre of Capital.

Vogl identified what he called the "oldest and most deep seated convictions" of liberal economics as arising from "the conviction that market activity is an exemplary locus of order, integration mechanisms, harmonization, appropriate allocation, and hence social rationality, and that it demands to be represented in a coherent, systematic way." At the core of such representations is the notion of individual actions motivated only by self-interest leading unintentionally to socially-beneficial outcomes.

A recurring feature of theodicy is the assumption of a closed system, "characterized by constancy of sum and the preservation of energy," as Vogl described Leibniz's metaphysics. In other words, the desire to be reassured about the ultimately benign nature of God, the universe or the economic system – especially when confronted with disconcerting evidence to the contrary – leads inexorably back to the notion of equilibrium, a self-correcting mechanism that presupposes a closed system. That is the narrative box we are in. It is how that story goes. No one is immune from the desire for reassurance. 

The question that has to be asked, though, is whether the detachment and complacency enabled by such reassurance is not itself the greater evil. To paraphrase Leopold Amery, quoting Oliver Cromwell, "Depart, Invisible Hand, and let us have done with you. In the name of God, go!"

Monday, February 5, 2018

End Of The Obama-Yellen Economy

For the past year the US has been essentially operating on an Obama-Yellen economy, at least as far as the big macroeconomic policies have been concerned in terms of fiscal and monetary policies.  We saw basically a continuation of what had been seeing in previous years, steady growth with inflation under control.  There was some uptick in wage growth, although that had already started in the previous year.  He has supposedly engaged in a lot of deregulation, but most of it that has gotten a lot of attention has involved making it easier for firms to pollute in various ways, with squashing renewable energy projects while super encouraging fossil fuels and coal.  Indeed, about 50% of the increase in capital investment in the US last year was in the energy sector.

One area where Trump's policy, or expectation of it, has had a noticeable influence has been the expectation of his corporate tax cut on the stock market, ,which has risen a lot since his election, even after taking account of the declines in the past week (although the market rose more in percentage terms in Obama's first year than it did in Trump's first year).  But, of course, stock markets are famous for buying on the rumor and selling on the news.  Now the market continued to zoom after the tax cut passed for awhile, but now some realities may be kicking in regarding the full implications of it.  The Obama fiscal policy is over, and Janet Yellen officially went out the door at the Fed at 9 AM this morning when her successor was sworn in as the new Fed Chair.

So why is the realization of the end of the Obama-Yellen economy downing the market so hard?  One side item that has probably exacerbated things and has little to do with Trump or the rest has been the more dramatic collapse of the cryptocurrency markets, now down well over 50% from its November high. I shall not get into the details of that or where I think it is going, but I suspect the sharper plunging those markets were doing this past week have spilled over to some extent into the stock market.

That said, it has been noted by a wide range of people, with Robert Shiller perhaps the most prominent, that the US stock market appeared to have become somewhat overvalued, with Shiller claiming it has had the highest ratios of prices to recent trends of earnings of any major national stock market.  Many have been warning of an impending correction, and it looks like it is here.  If it does not go down too much more, it will not in the end be a big deal, a merely useful correction.

That said, and along with the caveat regarding the drag coming from the epiphenomenon of the crytpocurrency crash, there is reason to believe that this recent market drop may well reflect some realizations about the implications of Trump policies, along with perhaps jut a bit of confidence loss due to the departure of the incredibly calming and reliable Janet Yellen from the Fed.  A lot of talk has been that with wage pressures rising, inflation expectations may be rising, and with that that interest rates may be pushed up by the Fed.  On top of that there was the realization a week ago that Treasury borrowing is really up thanks to the Trump tax cut, estimated to be up 84%, and we have a debt ceiling increase needed in probably a month, not to mention another possible government shutdown looming this week (probably to be put off for another month).  In any case the unexpectedly high increase in borrowing will put upward pressure on interest rates, irrespective of inflation or Fed policies affecting short term interest rates.  I suspect this matter is what has really gotten the stock market spooked.  They spent all last year capitalizing in their higher after tax profits, but had failed to capitalize in the higher interest rates to accompany the higher budget deficits.

I think the market is paying less attention to these, but Trump's policies also have some negative implications for growth, although less upward pressure on growth might actually help right now (and the rest of the world economy is now officially growing well, thank you Obama-Yellen).  So we have his anti-immigration policy, which most of his supporters do not understand will slow growth.  There is also the threat of a trade war.  Of course simply engaging in protectionism is a mixed bag, with import competing industries gaining as other parts of the economy lose.  But the losses become more serious when foreigners retaliate against our exports, as China did today against US wheat exports in response to our tariffs on solar cells and air conditioners. Again, most Trump supporters are under the delusion that all this is just a big plus for the US economy.

I am not forecasting a near term recession for the US economy, although one could happen at any time.  The general boom in the world economy will help prop us up,  and some of the financial problems we are looking at may further depress the dollar, thus boosting US exports.  But it would seem that markets have now realized that we are in the Trump economy, and that means much higher budget deficits with likely upward pressure on interest rates, and those are indeed not good for the stock market, which even Trump knows.  But given how much he has bragged about the stock market performance in the last year, he is in he situation where having lived by the stock market he can die by the stock market as well.

Barkley Rosser

Friday, February 2, 2018

Distractions, Distractions

Wow!  We have a great controversy!  A squib of a memo by the House Intel Comm has completely devoured the media.  A constitutional crisis!  Egad!  In two weeks, or maybe two months, it will be nothing.  But for now, well, very very very serious. At a minimum it has distracted everybody from Trump'sz gloriously successful State of the Union speech, which was so well received until this distraction that he thinks will bring about the end of that nasty Mueller investigation.

However, it now appears that this follows an older pattern.  When really serious stuff shows up in Trump World, the world is easily distracted by some much more minor scandal that gobbles up media and public attention.  So, during the campaign there was an important moment when it was reported that emails of the DNC had been hacked by Russians and handed over to Julian Assange and publicly leaked, with these memos being drip drip drip leaked day by day through the campaign.  But did this rather serious report get any public attention?  No no no. We had a much more important scandal to distract us with its outstanding shockingness.  It was the Grab 'em by the Pussy tapes, that, shock! were supposedly going to completely upend and end Trump's campaign.  Within a few weeks again it was no big deal, distracted by further scandals, but in the meantime the more serious matter of Russian serious intervention in the US election barely ever made it to any public attention at all, although we have been living with that attention to it ever since.

So what might this soon-to-be-forgotten memo be distracting us from (and I recognize that it is more serious than the grab 'em distraction)?  Well, buried on the inner pages of WaPo yesterday and scattered across secondary parts of the internet is a curious story that looks a lot more important than this nothing memo. Not only did Trump on the day befor his SOTU speech violate the Constitution by failing to obey a 515-5 vote in Congress to impose further sanctions on Russia for interfering in the US 2016 presidential election, but this astounding action was preceded by an apparently historically unprecedented event, the visit to Washington by the directors of all three of the top Russian intel agencies prior to his decision to ignore the mandate of the Congress.  Is anybody paying attention to this ultimate payoff to Putin for all the barely hidden Russian money in his unreleased tax returns?  Not with this wonderful distraction of this squib memo. 

So, who are these unprecedented visitors to Washington?  The one garnering the most attention is Sergy Navryshkin, director of the SVR, the Russian equivalent of the CIA, the main foreign intel agency of Russia.  In the Soviet era it was a dirzectorate of the KGB, and it had managed to get its own HQ in a suburban area of Moscow, obviously imitating Langley in the Washington NoVa suburbs even down to its architecture.  He is especially shocking in that in 2014 when Russia annexed Crimea, Navryshkin was placed under a travel ban by Obama.  But, hey, that was Obama, and whatever he did is a negative to be undone by Trump.  As it is he is reported to have met with his US opposite number, CIA Director, Michael Pompeo, rumored to be the next Secretary of State when Tillerson is finally tossed, and a former Oklahoma congressman known to be a Trump inner loyalist. Supposedly they discussed terrorism, which they might have actually discussed a bit.

But then CIA Director Pompeo also met with Aleksandr Bortnikov, Director of the FSB, the  domestic intel agency of Russia, essentially its equivalent of the FBI, also a former directorate of the former Soviet KGB, whose HQ is in the actual notorious old HQ of the KGB and earlier Cheka in downtown Moscow on Lubyanka Square, a location where many people took bullets to the head.  Supposedly they also discussed terrorism.   As it is, I would think Bortnikov should have spoken with the current FBI director, his obvious opposite number, but, well, there are no reports of that happening.  But, hey, who is paying attention?  We are all obsessed with the nothing squib memo!

And finally we have the really murky one, the reported visit of Lieutenant General Igor Korobov, the director of GRU, the main Russian military intelligence agency.  Neither WaPo nor any other source I have been able to track down so far, but will check further, has reported with whom this character met. Presumably it was at a minimum one or more of the more than 10 US intel  agencies housed in the Department of Defense.  The two most prominent of those are the NSA and DIA, but the DOD contains more secret agencies, such as the NRO.  Frankly I suspect this is the real story, although for those who have managed to get past the distraction of the Nunes memo, to get to this they have to get past the shocking visit of the formerly banned SVR chief, Navyshkin story.  But, hey, when you have so many Russian spy chiefs visiting just before the US president ignores a Congressional law to impose further sanctions on Russia, well, who can keep track of all this, and who cares?  I mean, that Melania is upset over Donnie paying off a prostitute is much more important!

Addendum: Further checking has yet to turn up whom GRU chief Korobov met with in Washington, although I imagine it will eventually become public.  If it does not, well, this would be far more serious and disturbing than any of this, up there with Trump futzing seriously with starting a war with North Korea.

Barkley Rosser