Wednesday, December 31, 2014

Perceptions of incongruity: when is a "dollar" not worth a dollar?

Bruner and Postman (1949):
Generally speaking, there appear to be four kinds of reaction to rapidly presented incongruities. The first of these we have called the dominance reaction. It consists, essentially, of a "perceptual denial" of the incongruous elements m the stimulus pattern. Faced with a red six of spades, for example, a subject may report with considerable assurance, "the six of spades" or the "six of hearts," depending upon whether he is color or form bound. In the one case the form dominates and the color is assimilated to it; in the other the stimulus color dominates and form is assimilated to it. In both instances the perceptual resultant conforms with past expectations about the "normal" nature of playing cards.
The full title of Bruner and Postman's 1949 article is "ON THE PERCEPTION OF INCONGRUITY: A PARADIGM." In The Structure of Scientific Revolutions, Thomas Kuhn referred to the research as "a psychological experiment that deserves to be far better known outside the trade."

The Walrasian numéraire is incongruous. It is not money. It is, as Orléan explained. "a purely technical device, introduced simply for the purpose of making exchange values [in a barter economy] explicit." It is, in other words, a red six of spades. What Bruner and Postman called the dominance reaction leads the subject to perceive the numéraire as good old dollar-in-the-pocket money. But it is not money because in the model real money does not exist. This incongruity produces "a bit of economic sophistry." (Clark) "unacceptable nonsense," (Little) "a still thicker and more terrifying smoke-screen," (Chipman and Moore) and "rubbish that prevents the flowering of new theory," (Minsky).

Isn't it about time to call a red spade a red spade?

Tuesday, December 30, 2014

Pipe Dreams and Paradigms

On Democracy Now, December 12, 2014, Amy Goodman spoke with Sean Sweeney of the Cornell Global Labor Institute about claims that the Keystone XL pipeline would create 250,000 jobs. The transcript below is from the part of the interview that starts at around time 00:55 on the embedded video.

AMY GOODMAN: ...You have been involved at a high level when it comes to Keystone XL and providing the numbers for President Obama around it, is that right? 
SEAN SWEENEY: That’s correct, yes, the job figures. 
AMY GOODMAN: What have you found?
SEAN SWEENEY: Well, the jobs debate has been severely distorted by TransCanada Corporation and the American Petroleum Institute. They put forward numbers that really cannot stand up to serious scrutiny, based on normal research practices and methodologies. The numbers are far, far higher than it actually—real. The numbers submitted to the State Department were far, far lower. And this is borne out with the State Department’s environmental impact statement. 
AMY GOODMAN: Did you brief President Obama yourselves? 
SEAN SWEENEY: No, but we know that the president read the report — it was called "Pipe Dreams: Jobs Gained, Jobs Lost [by] the Construction of Keystone XL pipeline" — because he made reference to the figures. 
AMY GOODMAN: Because that is the issue that’s raised so often, that environmentalists are killing jobs by killing the Keystone XL. Explain how you arrive at your numbers. And how many jobs would be lost or gained? 
SEAN SWEENEY: Well, in many respects, the numbers were submitted by TransCanada to the State Department, and we simply interrogated the claims of the multiplier effect, which wonky researchers understand is the jobs that—indirect and induced jobs that would be created by a certain amount of dollars spent on a project. The numbers, you’ll notice, Amy, have not gone down with the jobs, even though the project is half-completed. So, the numbers that they originally claimed three years ago have not gone down at all, but at least—or almost half of the pipeline has actually been constructed. [emphasis added]
The point Sandwichman has been trying to make over the last couple of months -- beginning with this post on Public Works, Economic Stabilization and Cost-Benefit Sophistry -- is that secondary or indirect benefits have been excluded from cost-benefit analysis for public works projects. By itself, this exclusion introduces the possibility of undervaluing the benefits of public works projects. However, as the  Report of Panel of Consultants on Secondary or Indirect Benefits of Water-Use Projects makes clear, such indirect benefits are "so ramifying, involved and conjectural that the attempt to compute them... cannot properly be regarded as 'measurement'," (see also part 2).

So what are we left with? Exclusion of indirect benefits from cost benefit analysis of public works projects coupled with systematic exaggeration of indirect benefits from private investment. But wait. There's more. Those private investments have social costs that just happen to be estimated according to a formula that discounts future benefits and costs in addition to excluding secondary benefits from current carbon abatement. From "More than Meets the Eye: The Social Cost of Carbon in U.S. Climate Policy, in Plain English" by Ruth Greenspan Bell and Diane Callan:
In the calculation of costs, benefits, and the social cost of carbon, the choice of discount rate has enormous impact, influencing whether economists recommend to invest today or much later. From the policy perspective of the economists who value this calculation, the higher the discount rate, the less significant future costs become.
In 2010 the U.S government's Interagency Working Group on Social Cost of Carbon (IAWG) presented its estimate of the social cost of carbon "to allow agencies to incorporate the social benefits of reducing carbon dioxide (CO2) emissions into cost-benefit analyses of regulatory actions that have small, or 'marginal,' impacts on cumulative global emissions." The IAWG's central estimate for the social cost per ton of CO2 in 2010 was $21 in 2007 dollars, based on a 3% discount rate.

The D.I.C.E. are loaded. Not once. Not twice. But three times.

The Price Of Oil And The Environment In the Late Twenty-Teens

In my post yesterday on Looking Forward To The Late Twenty-Teens, I said I would not forecast the price of oil.  I shall not do so too precisely, but I think I will comment on likely effects of possible trajectories of it.  Indeed, I think the general trajectory is well known,with only bottoms, tops, and timing unknown.  In short, the price of oil will almost certainly decline some more, hit a bottom, and eventually go back up again, although with the unknowns I just mentioned.  For a highly informed analysis of the supply and demand factors I recommend the recent post on this by the highly knowledgeable Jim Hamilton at Econbrowser, who tells the scenario I just said, but also very carefully eschews making even short-term forecasts or anything about timing.

So, much of what I have to say should be boilerplate, although I have seen many denying parts of it.  The lower the price goes and the longer it stays there, the more this will help global economic growth over the next half decade, even though oil exporters will be hurt.  They are outnumbered by the oil importers, and such a scenario might even alter the prospects for the currently gloomy Euroland and Japan, both major oil importers, even temporarily overcoming their depressing demographics.

OTOH, this will hurt getting us off fossil fuels, which we need to do in the longer run to save the world from global warming. Ironically, however, in the short run, both China and the US economies are mildly aided by continuing warming, as has been projected by most models, with gains for about another degree or so of warming.  Why?  The gains from reducing winter heating costs will outweigh the losses from all the other welI known damages, which will eventually start outweighing those gains after that degree or so.  Of course there are many areas, particularly poor, low-lying nations, who will suffer nothing but damage from near term warming.

I see many saying that a lower price of oil will not slow the shift to alternatives, but, sorry, it will if it goes low and stays there.  Indeed, this is partly why the Saudis are letting it go  down.  They are at the bottom of the world supply curve, and they want to punish and eliminate various high cost competitors, some of whom they do not like (Russia, Iran), and some of whom they are friendlier with (US with all its new shale oil).  But they also  do not mind getting Americans out there buying those gas-hog SUVs again and just generally getting everybody back under their thumbs again.  And, if anybody thinks the Saudi royal family is about to get overthrown soon, well, not in the next five years I predict.  Sa'ud al-Faisal has been foreign minister since the mid-1970s, by far the longest seving such person in the world, and I predict he still will be in 2020.

That said, I do think that King Coal is dead in the US, once and for all, no matter what happens to the price of oil.  Natural gas is just that much cheaper now, and will remain so for a long time.

So, a lower price of oil will  help global economic growth in the next half decade or so,  but threatens to  make the global climate situation worse in the longer run.

Barkley Rosser

Kansas Courts Rule Education Cuts Violate Their Constitution

The Wichita Eagle reports on something conservatives might find abhorrent but I find rather delightful:
A three-judge school finance court has ruled that current funding of schools is inadequate under the state Constitution. Acting on earlier direction from the state Supreme Court, the Shawnee County District Court panel concluded that current funding falls short of what are called the “Rose standards,” a multi-part test for adequacy of school spending outlined in a Kentucky case and adopted by courts across the country ... The state could increase base state aid per pupil to $4,654 from its current level of $3,852 and also increase weightings in order to meet the constitutional requirement. Or it could leave the weightings untouched and raise base aid to $4,980. These fixes would cost between $548 million and $771 million a year, Robb said. “I think they’re just telling the Legislature that if you do this, the problem will go away.” Robb praised the ruling as a great victory for Kansas kids and said that it confirms that a decades-long problem of underfunding schools continues to persist ... Gov. Sam Brownback said in a statement that he was “still digesting the full implication of the district court’s 116-page ruling. I continue to believe that restructuring the school funding formula and implementing education policy reforms is critical not only to getting more money into our classrooms but also improving student achievement. I will be working with legislative leadership to address the best path forward
. Of course Brownback’s tax cuts have led to rising deficits as Kansas’s recovery has lagged that of the rest of the nation. Bill McBride has been leading the discussion on state fiscal austerity including this from a few months ago:
the public sector has declined significantly since Mr. Obama took office (down 657,000 jobs). These job losses have mostly been at the state and local level, but more recently at the Federal level … A big question is when the public sector layoffs will end. It appears the cutbacks are over at the state and local levels in the aggregate, but it appears cutbacks at the Federal level have slowed.
If we look at real government purchases at the state and local level, they fell dramatically in the aggregate from 2009 to 2012 but showed a modest turnaround in 2013. But real spending on education continued to fall in 2013. Education is the largest component of state and local budgets followed by public order and transportation. Table 3.15.6 from the BEA provides Real Government Consumption Expenditures and Gross Investment by Function in 2009$. From 2009 to 2012, real purchases on education by state and local governments fell from $820 billion to $771.3 billion, while their combined spending on public order and on transportation from $532 billion to $505.1 billion. The good news is that the latter rose to $517.9 billion in 2013. But spending on education dropped further to $757.5 billion. I am not an expert on what is Constitutional in each state but I do get that cutting education spending is both bad short-run macroeconomics in a still weak economy and horrible for long-term growth.

Looking Forward To The Late Twenty-Teens

Yes, at midnight on December 31, we shall be at the midpoint of this decade, going from the early twenty-teens to the late twenty-teens.  While celebrating half decades is not something done particularly, indeed for some decades we do not distinguish their halves.  Thus the late 90s was an economic boom period, the early 90s were not.  The late 60s became dominated by hippies and anti-war movement that split the Dems, while the early 60s was about New Frontier and Great Society, which split the Dems a different way as the South did not like civil rights legislation.  But people wore suits and thin ties rather than tie dye shirts.  The early 40s was WW II while the late 40s were postwar. But few bother making a big deal about the early 80s versus the late 80s, even if I can argue that there were important differences between them after the fact now.

A century ago, the middle of the decade brought to an end "the long 19th century" as WW I broke up the order that was established a century earlier in the mid-eighteen-teens at the Congress of Vienna after Napoleon was finally defeated at Waterloo.  This may not be the end of a "long 20th century," but who knows?  Maybe it is. In any case, I shall do a little looking forward, hopefully bringing in some larger movements.

Many observers seem to be pessimistic about economic prospects, both in the near term and the longer time horizon.  Many speak of secular stagnation, whether due to demographic, technological, or sociological reasons. One of the secular stagnationists, Tyler Cowen, is also pessimistic about the coming year, except for the US and India.  Paul Krugman in his interview with Ezra Klein actually talks about the next five years, but only in terms of income inequality, which he does not seem optimistic will be overcome.  While I think Krugman is probably right about that, I may be not quite as pessimistic as Cowen or some of these others, despite not having a ready explanation for  how to overcome the drags from falling birth rates, a lack of  obvious growth-enhancing new technologies, or the heavy weight of severe income inequality.  Nevertheless, I think many are too gloomy about the next half decade, even if Cowen proves right that this coming year is full of dangers and several nations fall into recessions (some almost  certainly will, e.g. Russia).

So, the past half decade has been dominated by the hangover from the Great Recession, which most Americans say is still going on, even if it technically stopped early in the half decade.  We know this is due to  stagnant real wages and slow job growth, even in the more rapidly growing US.  However, indeed it does seem that the US is growing more solidly now. Will it offset the negative trends in other major countries, including China and much of Europe?  I do not know, but I suspect that over the next half decade, we shall come out of the Great Recession's hangover, even if what goes on does not turn into an outright boom, at least globally.   Let me look at some trends around the world.

The most depressing scenarios seem to be for Europe and Japan, both of them dragged down by demography.  Abenomics seems to be stalling out, and the reappearance of crisis in Greece seems to threaten a revival of the recessionary euro crisis.  It may well be that neither of  these  are going to join in any serious growth scenario, but I think chances are good that neither will drag the world back into global recession.  Japan has been stagnant for a quarter of a century now, but it has not actually declined in any serious way.  There is no reason why it may not continue as it has, stable in its pleasant stagnation (life is  mostly pretty good in Japan), not contributing to major world growth, but also not dragging it down.  Likewise in Europe, we may not see much growth, although maybe Eastern Europe will return to  growth after falling behind Western Europe during the Great Recession.  But the many who have forecast a blowup and end to the euro have so far proven wrong.  The euro politicians are really committed to keeping it going and will cut deals to make it do so.  It may look now like Greece will blow things up, but while it triggered a crisis four years ago, it failed to end  the euro, and I do not see it doing so again.  Even if Greece exits the euro, I do not see why that should necessarily spread to others in the eurozone.  It might just be the best solution.

Anyway, the sources of growth would seem to need to come from elsewhere.  Pessimists talk of a "middle income trap," and see the BRICS and some others falling into that. But, I do not see what the mechanism of such a trap is.  Why cannot these nations follow the East Asian tigers who have grown to very high real per capita income levels?   That many are stalled out right now does not mean that they have to remain stalled out.

While Cowen forecasts stagnation for next year for Brazil and Mexico, I do not see a necessary reason why either of them, or Latin America more broadly, should remain stalled out.  Deceleration of growth in China has been pointed to as a source of this stalling out, but if the US can continue to grow, it may be able to provide that engine to get them going, and they may be able to stimulate each other and grow together.

Another area where we may see acceleration of growth is Africa.  Much of Africa is growing rapidly right now, including some unexpected nations such as Mozambique.  Clearly Africa has many problems, from tribalism, religious war, corrupt Big Men leaders, and epidemics.  But while some areas will probably remain mired in these over the next half decade, with the uber poverty-stricken Sahel zone of Niger, Chad, Central African Republic, and South Sudan, presenting an especially severe challenge. But, with rising populations and hopefully rising inter-African trade, we may see more and more nations coming to resemble Mozambique and embark on sustained growth.  There are good chances that Africa will increasingly become a growth engine of the world economy.

I am not going to make any overly specific forecast for China.  For both demographic and Gerschenkronian catchup reasons, I think it is likely that China's growth will continue to decelerate.  But it may well maintain fairly high growth rates despite some slowing down, at least for  the next half decade.  Certainly the development of the balance between the US and China will be an enormously dominating theme for this period, whatever is going on in other parts of the world (and I shall stay away from forecasting about Middle Eastern religious war or what will happen with Russia and the rest of the world, much of which will be strongly influenced by the difficult-to-forecast price of oil)..

In the US, I am thinking that a major change may be less broadly demographic and more to do  with generations.  The Greatest Generation will not totally die out,  but effectively they are done for, with the retirement of the last WW II vet from Congress, John Dingell, who served there longer than anybody ever, symbolic.  He and G.H.W. Bush and Bob Dole may still be alive five years from now, but they and their cohort will be exercising essentially zero influence by then.  Their numbers are rapidly dwindling, and they are all going to be  very old, over 85 and more.  To the extent that this milestone coming up marks the end of a long 20th century, it may be in the final passing of any influence of this generation.

Also, while few speak of them, the Silent Generation will pretty much be retired by then, although still around in numbers.  They often get ignored as the more numerous ones surrounding them have dominated the picture, but they have been a curiously stabilizing force in US society probably underappreciated.  But they will turn into retired geezers, if not ready for the nursing homes like the remnant of the Greatest Generation.

The noisy and pompous baby boomers will, of course, be retiring in droves, although the highwater mark of that wave of retirements will only be hitting at the end of the half  decade, after the peak cohort born in 1957 hits 62 in 2019 and into the next half decade.  The majority of baby boomers will still be working at the end of  the half decade, but most  of the front end crowd will be retired, if inevitably likely to still be as  noisy and attention-demanding as they are now, even if they find others less willing to grant them the attention they think they so richly deserve.

The Gen-Xers are already pretty much all into middle age, although many of them still under 40 may be denying it.  By the end of the half decade, they will no longer be able to deny it.  They will become our dominant middle aged group, and given what we know about age and happiness, they will be probably be so miserable they will not be able even to be ironic anymore.

Which brings us to the rising millennials, those children of the baby boomers whom they both resemble and resent.  I find it funny when I read of people in Washington who are 36 or 37 claiming to be millennials.  Are they?  I kind of think they are just late stage Gen-Xers who are  in denial and trying to be in with the cooler young millennial crowd.  Of course, this brings out that these generation boundaries are somewhat fuzzy, but I guess that certainly people in their early 30s are millennials, and clearly they are going to become an increasingly important and influential  group over the next half decade, for better or worse.  On the better side, it  may well be that their large numbers and rising skills will be the driving force that will overcome the stagnation that so many are prophesying, whether it is due to coming up with those growth-generating technical innovations or just through sheer energy and enthusiasm.

Which brings me up to a question and point almost nobody is talking about: who is the next generation?  I have seen these datings of generations, and some have the millennials petering out in terms of birth years around 18 years ago or so.  By some measures, this year's freshmen in colleges are not millennials, but the next generation.  Are they Gen-Z, if the millennials are Gen-Y?  Are they the post-millennials?  We do not have a name for them yet, and they do not yet seem to be forming an identity for themselves either.  But I am reasonably certain that current undergrads are probably the last round of the millennials.  If current freshmen are not the front end of the next generation, those in high school are, and those in middle school and elementary school will certainly be fully part of it.

So, I forecast that a major development during the next half decade is that the successor generation to the millennials will emerge and begin to stake out their own identity, whatever that is, and I shall make no effort to forecast  what that will be or what they will do.  But, perhaps they too will contribute to overcoming secular stagnation and keeping the world economy going.

And that is enough prophesying from this old front end baby boomer for now.  Good night and happy new year and happy new half decade, everybody, :-)!

Barkley Rosser

Update:  I shall add one more item to my quasi-optimistic scenario: Indonesia, world's fourth largest nation in population, about which few comment.  It had a democratic power transfer this past year to a moderately populist new president and is growing at a reasonably steady pace, which might well continue.  It may help be one of those steady anchors in the world over the next half decade. I also note that it is the world's largest Muslim nation, and its moderate political regime may yet offer a model to that part of the world eventually.

1/1/15 Update:  Another decade that was  sharply split in US history was the 1860s.  This year will be the final year of  recognizing the sesquicentennial of the US Civil War, with that decade obviously sharply split over that event..

Monday, December 29, 2014

Indirect and Incorrect Tests of Ricardian Equivalence and Supply-side Economics

The latest garbage from Stephen Moore on what Paul Krugman allegedly said and on tax revenues during the 1980’s got me thinking oddly about an alleged test of Ricardian Equivalence by Paul Evans . But let’s start with this whooper from Moore about Art Laffer’s cocktail napkin:
It was 40 years ago this month that two of President Gerald Ford’s top White House advisers, Dick Cheney and Don Rumsfeld, gathered for a steak dinner at the Two Continents restaurant in Washington with Wall Street Journal editorial writer Jude Wanniski and Arthur Laffer ... This was the first real post-World War II intellectual challenge to the reigning orthodoxy of Keynesian economics, which preached that when the economy is growing too slowly, the government should stimulate demand for products with surges in spending.
I guess Moore has never heard of the Friedman-Phelps model and how combining it with rational expectations started the New Classical challenge to Keynesian economics. This all started well before this dinner and Gerald Ford’s stupid WIN buttons. But our current post is about the 1980’s when some classical economists were predicting that the Reagan tax cuts will lead to less national savings and higher real interest rates thereby crowding-out investment and lowering long-term growth. Proponents of Ricardian Equivalence, however, suggested that tax cuts not associated with permanent reductions in government spending would be entirely saved, which meant there would be no effect at all. Evans ran a regression of interest rates and the Reagan deficit to argue that the traditional effect was not consistent with empirical evidence. While some argued that non-fiscal macroeconomic factors could be lead to a negative relationship (recessions lowering interest rates and tax revenues), Evans noted he was indeed capturing a period of strong fiscal stimulus. But note during this period, consumption did rise as did real interest rates. What Evans captured was a decline in nominal interest rates from the steep decline in inflation. In a way Moore’s latest commits the same two sins inherent in the Evans regression equation. First it is only an indirect test- which we will get back to. Secondly, it confuses nominal with real as Paul explained:
I have a suspicion that the Post forced him to include the inflation-adjusted number, rather than let him get away with the gee-whiz nominal number, which is, um, inflated by the relatively high rate of inflation that prevailed even in the later Reagan years. In any case, however, Moore offers no context, leaving the impression that this was an extraordinary achievement. So I looked at real federal receipts over a longer period
In an update, Paul noted:
I actually should have used total federal receipts, not just taxes. When you do this the pattern is weaker but basically the same: Real revenue growth 36 percent in the 8 years before Reagan, 26 percent under Reagan, 28 percent in the years following.
In a way, this mea culpa may have been unnecessary. Moore wanted us to believe that the income tax cuts led to more tax revenues but he included in numbers the receipts from the increase in the payroll tax. I noted the importance of this:
The usual line is that Federal tax revenues almost doubled from $517.1 billion in 1980 to $1032.0 in 1990. The inflation-adjusted part comes from the fact that the GDP deflator rose by 50.3% over this period so in real terms revenues rose by 32.8% over the entire decade. But there is another serious problem with this that anyone who followed the various tax policy changes during the Reagan years should know. Yes income tax rates were cut in 1981 but there were various tax rate increases that followed including a significant increase in payroll tax rates in 1983 ... Payroll taxes rose from $157.8 billion in 1980 to $380 billion in 1990. Yes, a 140.8% nominal increase and a 60.3% increase in real terms when this tax rate was increased. All other Federal taxes therefore rose by only 20.8% in real terms over the decade.
But isn’t supply-side economics about the alleged benefit to output growth rather than tax revenues? To put this in context, had there been no damage to economic growth from the 1981 tax cut, output would have grown by 3.5% per year or by more than 40% during the decade. However, we got something on the order of 3% output growth per year or less than 35% during the decade, which is why income taxes rose by less than 21%. Payroll taxes rose by 60% precisely because that tax rate was increased. But maybe it is best to simply turn the microphone over to Dean Baker:
Moore likes to have the world begin in 1982. This was the trough of the steepest downturn in the post-war era. Economies typically bounce back from steep downturns with steep upturns (not in the most recent one, because that was the result of a collapsed bubble). For this reason the recovery is primarily a measure of the severity of the downturn. The more honest way to measure an economy's performance is comparing it to the prior business cycle peak. By this measure, the 1980s had slower growth then high tax days of the 1970s and much worse growth than the higher tax days of the 1960s. The world looks a bit better if we start at 1982, but that is not a serious way to assess the Reagan performance. This reminds me of a time when I was on a radio show with Moore. Then too he was touting the wonders of the Reagan boom. I pointed out that the 1970s had better growth than the 1980s and offered Moore a $100 bet on the topic. Moore accepted and then touted the 1982 to 1989 growth rate. When I pointed out that the 1980s began in 1980, Moore got upset. Unfortunately for Moore and other Laffer-Reagan backers, the 1980s still begin in 1980.

Sunday, December 28, 2014

Spoiler Alert: Correcting The Imitation Game

Spoiler Alert. I am going to point out historical inaccuracies in the otherwise excellent movie, The Imitation Game, about the life of mathematician-cryptanalyst-computer scientist, Alan Turing, who was the most important person in the Ultra Project at Bletchley Park in UK during WW II that led to the important breaking of the German Enigma machine's codemaking system, and, perhaps more importantly, the father of the successful effort to use this intelligence without revealing that they had done so with their bombe computer.  Indeed, it was only in 2012 that the two papers written by Turing with I.J. Good ("Jack") on how this Bayesian statistical method worked were finally declassified. So, if you have not seen the movie and do not want anything given away, do not read this any further.

Let me note, that while I shall be focusing on distortions and elisions, the movie is much closer to being historically accurate than A Beautiful Mind about John Nash.  Of course, they both appeal to a broader audience by emphasizing problems faced by the protagonists, Turing's tragic position as a genuine gay martyr (the logo for Apple, Inc. is a partly bitten apple, memorializing the cyanide-laced apple Turing bit when he committed suicide in 1954 following his chemical castration for being convicted of "indecency" in 1951).  Nash suffered from being poorly treated for his paranoid schizophrenia.

Despite its deviations from reality, The Imitation Game is an excellent movie (as is A Beautiful Mind), fully worthy of the 5 Golden Globe nominations it has received, including for Best Picture, Best Actor (Benedict Cumberbatch playing Turing), and Best Actress (Keira Knightly playing Joan Clarke).  So, on to correcting it.

What is most wrong with the overall plot?

The main problem is overstating and misrepresenting Turing's role in what happened at Bletchley Park, including his relations with his co-workers, although he was indeed massively socially inept.  He is presented as coming in and being completely alienated from all of them, with one of them, chess champion Hugh Alexander, the leader of the Hut 8 group he was in, and angry with him.  The others are all  making unproductive efforts at cracking the Enigma code in real time, whereas Turing supposedly has the idea of building a machine to beat the machine.  All the others are shown as viewing this as rank insanity as well as by those above them.  Turing is seen as going around all of them to appeal successfully to Winston Churchill, who initially provides funding and support and eventually puts Turing in charge over Alexander and the others.  They eventually come around to helping and supporting him, although pretty much all the crucial insights are seen to be by him.

This is mistaken on several grounds.  The first is that those running the Government Code and Cypher School (GC&CS) operation already knew that they wanted to build a machine to beat Enigma, this having been decided when GC&CS got their enigma machine from Polish intelligence in July, 1939, with the Poles already having developed a primitive machine to decode it.  Turing was consciously hired to improve this machine, based on his famous writings on computers already out there, and not only was he not reviled and ignored, he was initially in charge of the operations at Hut 8, remaining so until late 1942, when he was replaced by Hugh Alexander, his deputy up to that point, who had been running the day to day operations anyway.  Needless to say, showing it the movie's way heightens the drama, not to mention the daring heroism of Turing.

Who is Most Misrepresented?

John Cairncross, the Soviet  spy in Hut 8.  He was not in Hut 8, but in Hut 6 and worked as a translater and linguist, not as a cryptanalyst. His widow claims he did not even know Alan Turing, although that is not certain.  But he certainly did not work with him.

It is true that Cairncross was a Soviet spy, as is recounted in his memoir from 1993, The Enigma Spy.  He is even more  famous for having been allegedly the Fifth Man of the "Magnificent Five" Soviet spies in Britain, led by Kim Philby, all of them idealistic communists recruited at Cambridge University in the 1930s.  He was the last caught and may have provided more useful intelligence over his career than any of them, serving on a Treasury committee that oversaw the Defence budget in the late 1940s.  At Bletchley Park he sent apparently sent useful information to the Soviets during the Battle of Kursk, and after the war he reported to them on British plans to build nuclear weapons.

Besides that he did not work with Turing and was not in the same hut, and was not a cryptanalyst. Another error is that he is presented as having been consciously put in there by MI6 Director, Sir Stewart Menzies, to feed selected information to the Soviets.  There is no historical evidence of this, and that he operated for a long time after the war without being caught is the best evidence that this is not historically accurate.  However, in the movie, it made Turing's role even more dramatic in that he is put into the position of having to determine what got fed to Cairncross to feed to the Soviets, although in fact they may not even have known each other, the place being highly compartmentalized.   I cannot leave this without noting that Cairncross had a moderately well known development economist brother, Alec Cairncross.

Intermediately misrepresented.

Hugh Alexander has already been mentioned, although in general he comes off pretty well, even if the precise facts of his relationship with Turing are off, with him replacing Turing as Hut 8 head rather than the other way around.  Also, when Turing made his appeal to Churchill for more assistance in October, 1941, it was jointly with Alexander and two  of his chess champion friends, both of them operating as cryptanalysts out of Hut 6, Sir Stuart Milner-Barry and Gordon Welchman.  In fact, it was Milner-Barry who carried the letter to Churchill and who would in 1992 lead the effort to prevent Bletchley Park from being torn down (it is now a museum).  (Another chess champion friend of Alexander's there was Harry Golombeck, a famous chess commentator after the war.) While in Hut 6 (which dealt with German army and air force enigmas, while 8 focused on naval ones, apparently more challenging), Welchman worked with Turing on building the bombe, and was the person who suggested the speed increasing diagonal wiring that is presented in the movie as being suggested by Hugh Alexander.  However, neither Milner-Barry nor Welchman a(nor Golombeck) appear in the film, even if their fellow Hut 6 member, Cairncross does.  A curious detail is that Alexander, Milner-Barry, and Golombeck were all participating in a chess olympiad in Buenos Aires when WW II broke out in 1939, immediately leaving for England to join GC&CS.

As for Hugh Alexander, he would join the successor to the GC&CS, the General Communications Headquarters (HCGQ) in 1949 as its Director of Cryptanalysis, which he did for 20 years until 1969.  This removed him from publicly playing chess, although he reportedly defeated later world champion, the Soviet Mikhail Botvinnick, in a game played by radio. GCHQ is the UK equivalent of the US's NSA.

I.J. ("Jack") Good has already been mentioned above as working closely with Turing.  This continued after the war, and Good was also working in the same computer science lab at the University of Manchester that Turing was when he was arrested in 1951.  In short, in reality, Turing may have been intellectually closer to Good than any of the others.  However, in the movie, he is shown treating Good with little respect.  There is some truth to this in that when Good first showed up, Turing caught him sleeping on the floor (something one would expect of Turing actually) and was very angry.  But he eventually came to appreciate Good's goodness very much.  In later life Good, who also worked for awhile at GCHQ in the late 50s, would move to the US, ending up on the faculty of Virginia Tech, dying in Radford, VA in 2009 at the ripe old age of 92.

Peter Hilton is the youngest of the Hut 8 group shown in the movie, and he was indeed only 18 when he first started working there.  That is accurate.  However, it is Peter Hilton who was the one who had the dramatic insight about looking for "Heil Hitler"in the messages to decode that is attributed to Turing in one of the movie's most dramatic scenes, which happens in a tavern, in this regard replicating a similarly fallacious scene in A Beautiful Mind, when Nash supposedly discovered the Nash equilibrium in a bar, although the game described there is the Blonde in the Bar game, not precusely what Nash wrote about.  Hilton's having this idea was partly due to his knowing German very well as well as being an excellent cryptanalyst.

Hilton was a successful mathematician after the war, and I even knew him during 1962-63 after my late father hired him to join the math department at Cornell University, where Hilton stayed for  many years, even though we moved away in 1963.  I can attest that he was a very witty and interesting man,whom I enjoyed being around.  He was expert in homotopy and homology theory.

 On the latter he co-wrote a book in 1960 with Shaun Wiley, perhaps the most important missing person from the movie, and claimed by some to have been second only to Turing himself in terms of importance to the whole project of breaking the enigma code and also in Hut 8.  Wiley taught at Oxford for a few years after WW II, but became Chief Mathematician for GCHQ in 1958, although he later re-emerged to continue an academic career.  Among others, one of his PhD students was E. Christopher Zeeman, an important catastrophe theorist, and the first to apply catastrophe theory to economics in a 1974 paper on stock market crashes.  I met Wiley once in 1963 through my late father, and found him to be even wittier and livelier than his coauthor, Hilton.  He died in 2009 at age 96.

Who was not misrepresented?

Joan Clarke,the woman friend of Alan Turing.  I thought her complicated quasi-romance with Turing was made up, but on checking the internet, I found this was not so.  She is portrayed very accurately, being a wrangler in math at Cambridge, feeling discriminated against for her gender, and proposed to  by Turing.  Apparently she in fact was not fazed when he confessed his homosexuality to her, and it was he who withdrew from the engagement.  She would work at GCHQ after the war for the rest of her career and did marry a coworker.  Apparently she was a brilliant cryptanalyst, and much of what she did remains classified.

I note that my connection with this runs through my late father, J. Barkley Rosser, (Sr.), who was a PhD student of Alonzo Church, as was Alan Turing.  They never met, my father leaving Princeton in 1934 while Turing arrived in 1936, leaving in 1938.  But their work overlapped substantially, and they knew many of the same people.  However, I  did not figure out until I saw the credits at the close of the movie that I actually had met some of their associates.

Barkley Rosser

Update:  An interesting link is the British Alan Turing scrapbook where one can find how to get at his declassified papers with Good and also a link to a program where  Shaun Wiley, Joan Clarke, and Jack Good all spoke back in 1990.  Turing personally recruited Wiley, whom he had known as a grad student at Princeton.  Recent papers on the Good-Turing stuff are by Freer, Roy, and Tenenbaum and by Favoro, Nipoli, and Teh.

Another update: Lones Smith has made me aware of a claim by Rob Janoff to Holden Frith that the Apple logo had nothing to  do with Turing's apparent suicide, but has the bite in it to distinguish it from a cherry.  According to this, the widely reported story I repeated appeared after an earlier film, "Enigma," appeared in 2001, screen written by Tom Stoppard.  I note that there is a more recent theory that Turing died of an accidental ingestion of cyanide (he definitely died of cyanide poisoning), but that it was not from biting the bitten apple found by him.  As it was, he died on June 7, 1954, one day after the tenth anniversary of the D-Day landings.

Federal Tax Revenues During the 1980’s

Paul Krugman takes on another aspect with respect to the latest intellectual garbage from Stephen Moore by commenting on Moore’s claim that Federal tax revenues soared from 1980 to 1989:
I have a suspicion that the Post forced him to include the inflation-adjusted number, rather than let him get away with the gee-whiz nominal number, which is, um, inflated by the relatively high rate of inflation that prevailed even in the later Reagan years. In any case, however, Moore offers no context, leaving the impression that this was an extraordinary achievement. So I looked at real federal receipts over a longer period, shown above using a log scale so that the slope of the line represents the rate of growth. If you take the period Reagan was in the White House, 1981:1 to 1989:1, I get an increase of 14.3 percent; I’m not sure why Moore’s number is bigger, but never mind.
Paul is debunking a claim that has been made and debunked many times. The usual line is that Federal tax revenues almost doubled from $517.1 billion in 1980 to $1032.0 in 1990. The inflation-adjusted part comes from the fact that the GDP deflator rose by 50.3% over this period so in real terms revenues rose by 32.8% over the entire decade. But there is another serious problem with this that anyone who followed the various tax policy changes during the Reagan years should know. Yes income tax rates were cut in 1981 but there were various tax rate increases that followed including a significant increase in payroll tax rates in 1983. Table B.21 of the Economic Report of the President provides the details on Federal tax revenues. Payroll taxes rose from $157.8 billion in 1980 to $380 billion in 1990. Yes, a 140.8% nominal increase and a 60.3% increase in real terms when this tax rate was increased. All other Federal taxes therefore rose by only 20.8% in real terms over the decade. Since I’m not the first to point this out one would have to believe that Stephen Moore would have seen this often made point before. And yet he can’t be bothered to tell his readers the whole story? Update: When Moore wrote:
close to a 75 percent change (25 percent after inflation)
Paul wondered:
I get an increase of 14.3 percent; I’m not sure why Moore’s number is bigger, but never mind.
I noted prices rose by 50% during the 1980’s. Moore apparently took the difference between the nominal growth rate and the increase in the price level to get the real increase but this is only an approximation. For large changes one would need to take this difference and divide it by the new price level (1.5). Suppose a worker made $10 an hour in 1980 and enjoyed a $17.50 wage rate in 1990. Since his cost of living rose from $1 per unit of goods to $1.50 per unit of goods, his real wage in 1980$ was $11.67 an hour not $12.50 an hour. But Stephen Moore has always been very bad at basic arithmetic.

Saturday, December 27, 2014

Monetary Policy During the 1974 and 1982 Recessions

Mark Thoma calls the latest from Stephen Moore a joke. First – some of the choice Laughers from this idiotic if not dishonest oped:
It was 40 years ago this month that two of President Gerald Ford’s top White House advisers, Dick Cheney and Don Rumsfeld, gathered for a steak dinner at the Two Continents restaurant in Washington with Wall Street Journal editorial writer Jude Wanniski and Arthur Laffer, former chief economist at the Office of Management and Budget. The United States was in the grip of a gut-wrenching recession, and Laffer lectured to his dinner companions that the federal government’s 70 percent marginal tax rates were an economic toll booth slowing growth to a crawl ... Critics such as economist Paul Krugman object that rapid growth during the Reagan years was driven more by conventional Keynesian deficit spending than by reductions in tax rates.
I’ll simply repeat my gut reaction which I posted as a comment over at Mark’s place:
Mark Thoma calls Stephen Moore's defense of the Laugher Curve a joke. I call this line a lie: "Critics such as economist Paul Krugman object that rapid growth during the Reagan years was driven more by conventional Keynesian deficit spending than by reductions in tax rates." More blatant misrepresentations of what Krugman has written. Krugman blamed the 1982 recession (something Moore failed to mention) on tight money and the recovery from it on easy money. Growth under Reagan-Bush41 was only 3.0% per year as opposed to 3.5% before and after this era. Did Moore admit this? No. But what struck me was that 1974 dinner conversation with Cheney and Rumsfeld - who I guess Moore thinks are Nobel Prize winning economists or something. The 1974 recession was a deliberate monetary contraction to WIN (whip inflation now) as Gerald Ford's little buttons described policy. Interest rate went from 7% to 10%. Now when the FED decided to lower interest rates, the economy recovered. Stephen. Your own account properly done shows it was monetary policy and not your vaunted tax cuts that drove the macroeconomy during both of these periods. It is hard to tell. Is Moore too stupid to know this? Or is his doing his usual lying hoping his readers are that stupid?
Forgive me if I have been consumed with the role of monetary policy during notable business cycles from the last century. But it does seem that the right wing pretend economists are doing a lot of misrepresentations of our economic history.

Stephanie Kelton Goes To Washington

Leading Post Keynesian Modern Monetary Theorist (MMT) and Chair of the Economics Department at the University of Missouri-Kansas City (UMKC) is leaving there to become the Chief Economist of the Minority at the US Senate Budget Committee.  She is reported to have been hired by Bernie Sanders, who  will be ranking member of that committee after the Dems lose control of the Senate in January.  

While I am pleased to see her having influence in Washington, I am concerned about what will be happening will be happening in the UMKC econ department, which has been arguably the leading graduate program in the US strongly emphaszing a Post Keynesian approach.  With the death of Fred Lee in October and the retirement of John Henry last year, along with the previous departure of Randall Wray for the Levy Institute, there is not much left in that department of Post Keynesian economists, with Matt Forstater probably the last one holding down the fort there, with apparently the dean there blocking them from hiring people that Stephanie wanted.

What is Washington's gain, is UMKC's (and maybe academic Post Keynesianism's) loss.

Barkley Rosser

Update:  I put this in a comment, but it should probably be in the body of the post.  I have learned that Stephanie Kelton will be returning to UMKC after a two year leave in Washington.

Yet another update: I further note that Stephanie coined the term "deficit owl" to be distinguished from hawks and doves.  The former are austerians who wish to have deficits reduced, period. The latter worry about long term deficits, but are fine with them in the shorter run when the economy is down, such as Paul Krugman.  Deficit owls see them as useful in the longer run for maintaining the money supply and economic growth, with this MMT view associated with chartalism and functional  finance, first proposed by the late Abba Lerner.

Friday, December 26, 2014

A Great Book on the Great Depression

It hasn't been written yet, but in this post I'll tell you how to do it.  The title is Fire Sale: How the Asset Buying Binge of the Great Depression Changed America.  Here are the chapters:

1. The Great Depression: A Good Time to Have Money.  How did the rich (some of them) shelter their wealth during the Depression?  How deflation in goods increased the real return to holding liquid assets, and how asset price deflation offered opportunities to make lucrative long-term investments.  (Some Irving Fisher here on the mechanism of debt deflation and its logic for counterparties.)  Perhaps some cultural aspects: the portrayal of high-end consumption in books and movies, the golden age of tourism, etc.

2. Stocking up.  This chapter begins with the stock market crash of 1929 but then continues the story.  How did stocks fare over the '30s?  How did depressed stock prices allow for the consolidation of new financial empires?  Who were the big winners from the stock swoon, and how did the financial and industrial landscape of the post-WWII era reflect their gains?

3. This Land Is Your Land.  What happened to urban and rural land values during the Depression?  How did low prices make it possible for new land barons to emerge?  But a big part of the story is the purchase of large tracts of land for parks and public infrastructure, for instance as reservoirs (e.g. the Quabbin Reservoir in central Massachusetts).

4. Riding out the Slump.  A whole chapter should be devoted to the purchase of trolley lines at bargain prices by auto and tire producers.  What happened to public transit financially during the Depression, and how did this lead to a collapse in the value of trolley lines?  Who was building new housing during the '30s, where was it being built, and how did this affect the demand for transit vs cars?  And how did the scrapping of urban rail systems change the design of cities and suburbs?

5. After the Great Sale.  What were the long run impacts of the asset reshuffling of the the '30s?  How did it change the level of market concentration?  The role of family versus industrial farming in agriculture?  The face of urban America?  The political economy of the postwar era of renewed economic growth?

There are a lot of question marks in this outline, since many of these topics haven't been researched, at least not synoptically.  You have some work cut out for you, but you'll be fascinated by what you find, and your readers will be enthusiastic.  Do it.

Thursday, December 25, 2014

Monetary Policy During the 1921 Recovery

Robert Murphy went after Barkley arguing in part:
The economy had clearly bottomed out and was recovering before the Fed loosened up the monetary spigots, looking at various criteria. (I should admit that the argument for monetary stimulus does have some support if we look at interest rates, rather than monetary growth. I will elaborate on this in a future blog post.)
Barkley had to respond to a barrage of other attacks but let’s focus on his main point:
My post argued that there was monetary stimulus in 1921 and noted that even though there was downward stickiness of wages in 1945-46 and also in 1982, there were rapid bouncebacks with monetary policy in particular being stimulative during those episodes (and fiscal policy also being so in the 1982 one under Reagan).
The alleged evidence Murphy refers to was a drop in the nominal level of the M2 money supply from mid-1920 to mid-1921 as if the nominal money supply was the right criteria even during a period when the consumer price index (1982 = 100) dropped from 20.9 (June 1920) to 17.6 (June 1921). A balanced discussion of monetary policy during this period can be found here:
To return to monetary policy, while the broad US monetary aggregates M1 and M2 did fall in late 1920 and 1921, they clearly did not suffer a disastrous collapse to the same extent as money supply from 1929 to 1933. For example, the broad money supply as measured by M2 fell by about 6.37% from Q3 1920 to Q2 1921, but began growing again in Q3 1921
Can we do a little simple arithmetic? If the nominal money supply drops from say $47 billion to say $44 billion during a 12-month period when the price deflator dropped from 0.209 to 0.176, does that not mean that the real money supply rose from about $225 billion (in 1982$) to $250 billion? Can I simply ask what part of the real money supply do these Austrians not understand?

Singapore Noodles

EconoSpeak goes gastro!  Here's a scrumptious dish that fights back against holiday bloat.  The traditional recipe calls for shrimp instead of tofu.  I started making it with tofu since my partner is vegetarian, but then I realized I preferred it that way.  And subbing tofu for shrimp makes the dish just a little bit lighter, which adds to the appeal.

Rumor has it that this has nothing to do with Singapore.  It originated in Hong Kong and was given a name that sounded exotic and might increase sales.  But no matter.  I make it 1-2 times a month.  Leftovers are just as good as the first day, maybe better.

Singapore Noodles

1 lb. very thin rice noodles
2 tbs peanut oil plus more for frying the tofu
2 cloves garlic, finely chopped
2 tbs peeled, chopped ginger root
2 carrots, shredded
2 stalks celery, very thinly sliced
2 cups thinly sliced Napa cabbage
1 cup bean sprouts (or throw in a whole package, it's OK)
1 lb firm tofu, cut into slices about 1"x1"x1/3"
1½  tsp curry powder
1/4 tsp cayenne pepper
1 tsp sugar
salt and pepper to taste
1/4 cup soy sauce or more to taste
1 tbs toasted sesame oil

1. Prepare the tofu: press the slices between cloth or paper towels to remove most of the liquid, then fry them at medium-high heat in a nonstick pan with enough neutral oil to film the bottom of the pan.  When they are golden brown, flip them and fry the other side.  Drain on paper towels and set aside.  This will have to be done in multiple batches depending on the size of your pan.  It's a standard technique that can be used for preparing tofu for a variety of recipes.  You can buy pre-fried tofu at Asian markets, but it’s not as good.

2. Prepare the noodles: follow the directions on the package, taking into consideration they will be briefly stir-fried at the end.  Different products have very different cooking instructions.  The main thing is not to overcook, as the noodles will congeal into a thick, unappetizing mass.  You want a touch of al dente.

3. Prepare the sauce: combine the curry, cayenne, sugar, salt, pepper, and soy sauce.  There is considerable variety among soy sauces (and tamari), so experience and judgment are useful.  Don’t add less than 1/4 cup, but you might add a bit more if the soy sauce is on the light side.  Don’t go overboard, however, since you can always add more soy at the table.

4. Heat a wok and add the remaining oil.  When it is hot, add the garlic, ginger, carrots, celery, cabbage, and bean sprouts.  Stir-fry for 3 minutes.  Add the soy and spice mixture.  Toss for a moment to mix, and then add the tofu, tossing for at most a minute.  Now add the noodles and continue tossing until they are heated and combined with the sauce and vegetables.  This is the most difficult step, since the noodles must be separated to coat them more or less evenly, but you don’t want to make a complete mess.  Two implements, like a pair of wooden spoons, are necessary to do this.  Don’t spend more than 1-2 minutes on this last step.  When you are done, remove from the heat and stir in the sesame oil.

5. Serve immediately, and provide extra soy sauce, sesame oil and chili oil as condiments.

This makes 4-5 substantial servings.  Serve with beer or a not-too-dry white wine with a mineral finish.  Riesling is great.

Wednesday, December 24, 2014

Are Keynesians "Desperate" About the 1921 Recession?

So, Robert P. Murphy would have one and all believe, based on a post by him out of the Mises Institute of Canada on Dec. 22.  His post seems to be triggered by a mistaken comment I made to my own post here on the 1921 recession, although it did not appear in the main post itself and was not part of the main argument.  Murphy has long been one of those arguing that 1921 is indeed a role model for studying later downturns, with the supposed bottom line being that economies will bounce back on their own from sharp downturns if prices and wages are flexible and there are no efforts at monetary or fiscal stimulus.

 My post argued that there was monetary stimulus in 1921 and noted that even though there was downward stickiness of wages in 1945-46 and also in 1982, there were rapid bouncebacks with monetary policy in particular being stimulative during those episodes (and fiscal policy also being so in the 1982 one under Reagan).  Murphy's post has nothing to say about those episodes, meaning, I guess, that he is desperate with this post to distract from the complete failure on his and his allies parts to address these points.

So, let me confess and apologize for the mistake I made in one of the comments to my own post.  I falsely claimed that Commerce Secretary Hoover (under Harding) had initiated stimulative public spending in 1921, which, while it did not kick in until after the bounce happened, aided the move out of the recession.  This was inaccurate.  Hoover proposed such spending, but his proposals were not accepted.  He did increase public spending after 1929, as I also noted, and which Murphy does not dispute, indeed revisits and reiterates.

So, does this mistake on my part in this comment indicate "desperation," or is it those failing to reply to the arguments in the main part of my post (still waiting to see those) who are desperately floundering around for an appropriate response?  Murphy usefully provides data on federal spending during the period, and indeed it fell.  However, by far the largest decline he shows in his post was between 1919 and 1920, when federal spending fell from about $18 billion to merely $6 billion in 1920.  Murphy does not think that this sharp fiscal contraction had something to do with the collapse of the economy in 1920?  It is true that federal spending continued to decline, but it did so at a very slow rate.  So, it was $5 billion in 1921 and down to $3 billion in 1922, after which it stabilized.  So, yes, the pressure of fiscal policy was downwards, but nothing like 1919-20.  Murphy disagrees about monetary policy, but I shall not repeat the arguments here, and he does not present them again.

He also shows spending during the Hoover presidency.  Again, I agreed with him that those criticizing Hoover for running balanced budgets were off.  FDR ran on a balanced budget platform against his deficit spending.  However, while indeed Hoover did engage in public works spending, as I noted in my comment, building the Hoover Dam and a lot of airports, the increase in spending was relatively modest, although notable in percentage terms.  So, it was $3 billion in 1928 and 29, but had only risen to $4.5 billion by 1932 and 1933, to be compared with the $18 billion in 1919 and the $6 billion in 1920, much more stimulative than what Hoover had going after 1929, even if he had a rising trend.

Again, my story was more about monetary policy, and I repeat that neither Murphy nor any of his allies has even remotely responded to my points about what went on in 1945-46 or 1982.  There was a -12.7% change in GDP in 1945 with the fiscal spending decline, but also a quick bounceback the following year, like after WW I, but with downward wage stickiness and an expansionary monetary policy.  1982 also saw a rapid bounceback, but I leave it to anybody interested to go back and look at my original post that lays out further details, including commentary on our more recent case, which does not remotely resemble 1921.  The point that one might not be able to infer anything at all today about what policy today should be based on what went on in 1921 remains I believe both valid and pretty straightforward.   Looks to me like those disagreeing with this are the desperate ones.

Barkley Rosser

Forest Grump

I can’t let this go by without comment.  Today’s New York Times has a big front page story on the prospects for mitigating climate change through forest growth and protection.  It has stories about successes in Costa Rica and Brazil, with feel-good mentions of the butterflies, monkeys and other creatures whose habitats can be saved.  Only the most churlish reader would fail to jump on the bandwagon.

Churlish like me.  Actually, I’m completely on the bandwagon for protecting forest biodiversity, ecosystem services, habitat for the millions of human forest-dwellers, especially from traditional cultures, and the recreation and scientific values that natural forests can provide.  And I think there are modest gains to be made in climate protection, mainly having to do with the timing of atmospheric carbon loading.  But the story is profoundly misleading on its most important claim, that a ton of carbon withdrawals due to planting trees or not cutting down trees that were expected to be cut exactly offsets a ton of carbon released by extracting and burning fossil fuels.  Its casual use of “emissions” numbers assumes that this equivalence holds, and it’s wrong.

Specifically, the article claims that by massively increasing forest cover we can “pull a sizable fraction of human-released carbon dioxide out of the air and lock it into long-term storage.”  This is carbon we can then allow ourselves to release through the use of fossil energy, knowing we can make it go away.  It’s convenient to believe this, of course, since the resistance to cutting back on coal, gas and oil is intense, but what if it’s not true?  If we struggle to reach any fossil fuel carbon target, what’s the cost of setting the target too low?

The issue of forest sequestration and atmospheric carbon is far too complex to delve into here.  I can make only a few simple points.

1. The impact of forests on carbon cycling is complex and depends on a number of specifics, like the latitude of the forest, specific tree species and soil types.  Any simple statement about the effect of “forests” on global climate change is misleading.  It may well be the case that some forests (mainly boreal) are net contributors to climate forcing.

2. Carbon is withdrawn from the atmosphere when it is fixed in plant growth.  It returns to the atmosphere when plants decompose, as they will.  The net effect depends on the change in forest cover, not its amount.  To alter climate forcing over a given time period, say a century, this change has to be permanent over that same time period.  Now, why might a change in forest cover not be permanent?  Two good reasons: future land use or resource decisions by people and the effects of climate change itself.  If people 50 years from now cut down a forest we plant today, the effect is simply to reduce carbon loading in the present in order to speed it up in the future.  But climate change makes the problem even worse.  First, changes in temperature and precipitation patterns that are already baked in are likely to cause significant forest die-backs.  A portion of the trees we plant today are essentially doomed, although we don’t know which ones or how many.  Second, it is likely there will be severe impacts on agricultural productivity, especially toward the later years of this century, and that may lead to renewed forest-clearing to meet food needs.  The bottom line is that a ton of carbon released by burning fossil fuels is a definite ton, but a ton sequestered through forestation is a maybe ton, depending on future events we can’t control or predict.

3. The Times article played up natural forests, like Cuatro Rios, a recovered rainforest in Costa Rica.  Many of the projects financed by Reducing Emissions from Deforestation and Forest Degradation (REDD), a UN-based scheme for funneling carbon offsets into forestation, however, support monoculture plantations of fast-growing trees like eucalyptus, since this bulks up the short run sequestration numbers.  Such forests are of dubious value as habitat, and people from traditional forest communities are at risk of being expelled from their homes to make way for industrial tree operations.  Managing forests for carbon is not the same as managing them for cultural and ecological values.

So why, if a non-specialist like me can make these arguments, are the majority of climate scientists and environmental NGO’s so enthusiastic about the use for forestry for carbon mitigation?  I think there are a number of answers, with different people moved by different considerations.

1. From a scientific point of view, the problem of time frames simply doesn't come up in climate models, since the models are intractable over the longer time horizons that are relevant for policy purposes.  We know there is a short run sequestration benefit, and how much of that benefit will be reversed (as some of it almost certainly will be) in decades to come is not something the models can tell us.  Of course, such models also don’t include future human actions that can undo forest gains, nor can they.  The scientific credo is to say what you know and remain silent about what you don’t—minimization of Type I error.  It’s great for the progress of knowledge but often disastrous for pubic policy.

2. For those who care about natural forests, as most environmental groups do, the linkage between forestry and climate is immensely convenient.  National governments and international organizations have lined up behind REDD and similar programs, and it would seem to be insane not to encourage and benefit from this.  If the green groups can ensure that the definition of what constitutes a “forest” excludes mono-plantations and land grabs that expropriate indigenous people, their goals may be realized.  (It could happen, but I wouldn't bet on it.)  But signing on to a myth about climate in order to advance a forest agenda has costs for the climate.

3. The global forestry programs target tropical forests in developing countries.  They have the potential to transfer income from the rich to the poor—if the money isn't funneled into the pockets of politically-connected business interests that have seized forest lands and now demand to be paid in order not to clear them.  This is another potential convenience.  It’s so difficult to squeeze genuine development aid out of the wealthy countries, and if forest carbon can be a conduit, why not support it?  But this too ends up sacrificing carbon goals because the political will doesn't permit a direct, honest solution.

Am I missing something?  I wouldn't be surprised, and I’d be happy to be set straight.  I would especially encourage readers conversant with the science aspects of forestry and carbon cycling to respond.

The Productivity of Working Hours

John Pencavel, "The Productivity of Working Hours" forthcoming in The Economic Journal. (Online version, before publication in an issue, is now available for those with subscription or library access)
ABSTRACT: Observations on munition workers, most of them women, are organised to examine the relationship between their output and their working hours. The relationship is non-linear: below an hour’s threshold, output is proportional to hours; above a threshold, output rises at a decreasing rate as hours increase. Implications of this finding for the estimation of labour supply functions are considered. The findings also link up with the current research on the effects of long working hours on accidents and injuries.
An earlier version is also available as Institute for the Study of Labor (IZA) discussion paper.

UPDATE: Also featured on The Economist's Free Exchange blog on December 9th: "Proof that you should get a life."

More Piling On Cochrane: Why He Cannot Go Back To Being Taken Seriously Even About Asset Pricing

Oh, I cannot resist.  Since his effort to  dump on Keynesians in the WSJ, lots of people have been piling on John Cochrane, showing that nearly all his claims are not only laughingly bogus, but seriously unsupported even in his own column, such as failing even to mention a single supposedly Keynesian economist who forecast a return to recession as a result of budget sequestration, a centerpiece of his embarrassing column.  A sampling can be found Mark Thoma's links for today at economistsview, sort of a Christmas Eve special.

In any case, what caught my attention and is pushing me into  the piling on as well is a remark Brad DeLong made in his post at the link entitled "Cochrane ought to simply say..."  He suggests that Cochrane has made such a big fool of himself out of all this that he should just go back to working on asset pricing.  I am going to argue that even in that arena, he has made a bit of a fool of himself and should also be ignored to some extent, even though he has a long and respectable publication record in the area.

So, what is his problem?  He is one of the leading figures in finance who has simply ignored dealing seriously with the phenomenon of "fat tails," more properly known as kurtosis (or even as leptokurtosis), which are widely known to be ubiquitous in many financial time series.  This is  more a subject for Nassim Taleb, although he pushes things further to talk about full-blown Keynesian-Knightian uncertainty that he calls "black swans," arguing that modeling fat tails is a matter of "grey swans" because we can estimate various probability distributions that show them, and that the crash of 2008 was obviously coming, whereas true black swan uncertainty involves there being no probability distribution at all.

Where does Cochrane fail to do this?  In his widely used and admired grad textbook, _Asset Pricing_.  Let me say that indeed this is a well written book that does a good job of covering most of the material in standard financial  economics related to asset pricing.  However, it has one very unfortunate and peculiar lacuna, not corrected as of the last time I checked.  He simply does not discuss the existence of kurtosis or fat tails in most  financial time series.  The words "fat tails" "kurtosis" and "leptokurtosis" simply do not appear in his famous book. Nowhere, nada, not at all.

Now I have encountered admirers of his who argue that he does address the issue.  The defense in this case rests on noting that when he presents the theory of stochastic discount factors, he does note specifically which of the theorems hold when returns are non-Gaussian (allowing kurtosis) and which only hold when returns are Gaussian, that is normal, without any fat tails.  However, he fails to go on anywhere else in the book to discuss how to deal with the cases where they are not normal. I  note that some of the competitors to his book, such as that by Cambell, Lo, and MacKinlay, do at least talk about this issue and the fact that most returns are kurtotic, even if they do not say a whole lot about it. (It must be recognized that dealing with fat tails formally is hard, with copulas being one way that practitioners have attempted to do so, with the use of one of those, the bivariate normal Gaussian one developed by David Li becoming implicated in the blowing up of AIG in 2008, leading Li to escape to China.)

What is really curious here is that at the time of the crash in 2008, when he was criticized for not talking about fat tails, Cochrane defended himself by noting that Eugene Fama, also at Chicago Booth and his father-in-law to boot, knew all about fat tails because he had worked with Benoit Mandelbrot at one point, one of the earliest people to point out that asset returns have fat tails and proposed using fractals to study the phenomenon.  Indeed, Fama initially supported Mandelbrot's argument that variances are asymptotically infinite, but then turned against him on this matter (they do not appear to be so empirically), although ignoring evidence that fourth moments (kurtosis) may actually be so.  In any case, Cochrane claimed that even though Fama abandoned Mandelbrot on this issue, he knew about asset returns having fat tails and that anybody who studied with him knew this.  Maybe this is so, but there seems to be might little evidence that Cochrane has been passing this on to  his students, even though he is reputedly a good teacher.

BTW, I posted once on this specific matter previously at the time of the death of Benoit Mandelbrot.  One commenter argued then that what financial economists did instead of looking at kurtosis of the overall distributions was instead to focus on volatility clustering by using ARCH/GARCH models, and so on, which is true.  I noted then that these suffer from the problem that they do not model the exogenous shocks that set off the clusters, although such clusters clearly exist.  In any case, it remains true that Cochrane and his closest allies have continued to largely ignore the fat tails phenomenon, and this makes him look pretty pathetic in terms of why anybody should take him really seriously even in his area of most basic research.

Barkley Rosser

PS:  And Merry Christmas to all who celebrate it!

Tuesday, December 23, 2014

Wither the Ruble?

Did I mean to say "Whither the Ruble?"  No.  I am commenting on last week's jumping up and down over the 17% decline of the Russian ruble last Tuesday, led most loudly by Paul Krugman on how Putin's "bubble burst."  By the end of the week the ruble was only down  by 2% and rose again today, although this did not make the news that the commentary on how the ruble was done for and Putin was clearly paying the price for his sins (although, of course, it is the Russian people who are going to pay the price next year and possibly longer of the upcoming recession).

Quite aside from the obvious lack of further withering after last Tuesday's apparent meltdown, there are reasons to be somewhat cautious about predicting further major collapsing, although it certainly cannot be ruled out.  One ironically is a side effect of the economic sanctions and the Russian reaction to them, with the sanctions certainly having contributed substantially to last week's decline.  Imports into Russia have been sharply reduced, so that despite a major decline in oil export revenues as oil prices decline, the current account of Russia is in surplus and likely to remain so for the near future.

Another is that Putin went out of his way to largely eliminate Russian sovereign foreign debt, with the central bank still holding about $370 billion in foreign exchange reserves, although maybe as much as $100 billion of that is tied up in various ways making it all but unusable.  Where there is a Russian foreign debt problem is in the Russian private sector, with many Russian companies having run up foreign debt that must be refinanced next year.  This could be a big problem, if sanctions remain in place.  This is where the sanctions bite, and if the ruble were to resume falling seriously, would aggravate their refi problem.  Indeed, contemplation of this was a major part of Krugman's discussion, particularly another post on Russian foreign debt, which has been holding steady at about 35% of GDP, most of this private debt. 

Obviously, the main fundamental driving down the ruble has been the falling price of oil.  This could easily go lower and probably will, with the Saudis holding production steady and even stating that they could handle a $20 per barrel price.  They probably could, as the world's lowest cost producer.  But if oil hits such a price, it will not stay there long, and indeed bottomed out in the low 30s near the end of 2008 after the collapse of the then oil price bubble.  This one does not look so much like the collapse of a bubble as a basic supply and demand adjustment: demand has been weak and supply has increased from various sources.  The Saudis have decided to let the price fall enough to drive out the high cost producers, some of them in the US, and then the price will go back up, if not necessarily to where it used to be.  Indeed, some observers argue that oil is already oversold and could go back up to around $70 per barrel fairly soon, as part of the decline was due to technical trading, basically a downward bubble that may have finished. If this bounce happens, there will not be all that much more withering of the ruble.

Let me be clear that I am not at all applauding Putin, whom I despise, and obviously he could substantially improve the situation there if he stopped messing in eastern Ukraine and got the economic sanctions removed.  However, he seems to have sold the Russian people on suffering economic privation for these foreign escapades, at least for now, invoking WW II with charges of "fascism" in the Ukrainian government and "aggression"by NATO, these given some support by there actually being loudmouthed extreme nationalists in the Ukrainian government and the Kerry State Department having stupidly put the loudmouthed neocon, Victoria Nuland, into a senior position.  I know very knowledgeable and intelligent people in Moscow who are buying Putin's tripe.

As it is, I agree with Krugman that Putin's activities are indeed showing that "conquest is for losers," even if Putin can continue to con his own people on this for awhile longer.  In the immediate moment my biggest sympathy goes to Russia's central bank governor, Elvira Niubilla, who was pressued into helping finance a shady Rosneft deal, probably the immediate trigger of last Tuesday's collapse, and whom Putin has denounced for not stopping the decline.  Former central banker Victor Gerashenko has said that if he were in her position, he would "get a gun and shoot myself."  Sigh.

Barkley Rosser

Monday, December 22, 2014

World is Going to Hell -- Send Money!

"Today, we're preparing for one of the toughest fights of our lives... but we can't do it without you."
Most of these incessant solicitations from "progressive organizations" skip the inbox and go directly to the trash folder. Enough of them slip through to leave a vague ambience of doom and desperation.

It all started with those Reader's Digest "sweepstakes" didn't it? Then came Richard Viguerie and the reign of Robotype machine mail order conservatism.

Now everyone's doing it... doing it... doing it.

Sandwichman will MAKE THEM STOP! 

But I need your help...

Report of Panel of Consultants on Secondary or Indirect Benefits of Water-Use Projects, Part IIB

Conclusions and Recommendations

B. Summary of Principal Recommendations

This summary does not include all the minor and detailed recommendations and suggestions which appear in Parts III - VI of our report, but concentrates on those of major importance.

1. Secondary benefits are much less certain and calculable than primary, and more dependent on far-reaching hypotheses. moreover, it appears that usable formulas cannot be based on data that are capable of furnishing complete and accurate comparisons of effects "with and without" a given project. In recognition of this, we recommend that, in benefit-cost ratios, primary and secondary benefits be separately shown; e.g., if the total ratio is 1.8:1, but the primary-benefit ratio is 1.15:1, the result be expressed as (1.15 + .65):1.

2. It appears that Manual procedure for determining the scope of projects could result in carrying one project out on a scale such that the last separable increment would have a separate benefit-cost ratio barely more than one whereas early separable increments of some other projects, whose total benefit-cost ratio was lower than the total benefit-cost ratio of the first, might show a higher ratio than that of the final increment of the first project. We therefore recommend that benefit-cost ratios for separable increments be separately stated, in order that appropriations may be so allocated as to produce the combination of increments yielding the greatest total benefits.

3. We find that benefits "induced" by increased demand and benefits "stemming" from increased supply are of such character that, with minor exceptions, it is not proper to add them in figuring total secondary benefits from a given project at a given time, During construction, secondary benefits are all "induced", while during subsequent operation induced benefits (so far as not covered by "stemming" benefits) appear to be limited to identifiable particular cases of minor magnitude, and the main secondary benefits are of sorts for which the "stemming" procedure (with modifications which we will suggest) affords an appropriate rule-of-thumb approach. We therefore recommend that the calculation of benefits be separated between periods of construction and operation of a project, as, explained further in recommendations 4 and 5.

4. As to induced benefits taking the form of employing otherwise-unemployed resources during construction, we recommend that the Bureau explore with other appropriate agencies, such as the President's Council of Economic Advisors or the Bureau of the Budget, the possibility of setting up a sliding scale of such benefits, varying with the probable state of activity in the economy (the construction industry deserving special weight). Such a sliding scale might be made available as a standing formula for guidance in estimating such benefits. The appropriate time to apply the formula would be the last possible moment before decision on the undertaking of a project, when some reasonable forecast of the probable state of economic activity may be feasible. Any such overall national formula should be supplemented by local or area information which may indicate possibilities of mopping up local pools of unemployment or utilizing unused facilities. For the construction period, estimates varying with the probable state of economic activity, to the extent that forecasting is feasible, appear superior to blanket allowances, e.g., of 5% or 6%.

The result might be treated as an "offset to cost" of construction or as a public benefit. We see advantages and disadvantages for each method, and have no firm preference between them.

5. As to benefits "stemming from" increased supply of project products, we consider benefits of this sort exist, to an extent impossible to measure, but far less than the full amounts computed by the Manual procedures, We would accept a more limited form of this procedure as a rough approximate representative, not only of literal "stemming" effects, but also of more general effects, diffused through the economy and not at present measurable. We have in mind gains from lessening pressure of mobile resources on land areas other than project lands, and otherwise in-creasing productivity or lessening its decline. We propose four limitations on existing "stemming" procedure:

(a) Subtraction of full economic costs of "stemming" activities, or some agreed estimate of them, instead of the costs now subtracted.

(b) Reduction of disparities between commodities by exclusion of major processing operations.

(c) Allowance on the "without" side of the "with and without" comparison for benefits "stemming" from alternative uses of resources represented by project costs.

(d) As indicated in recommendation 3, above, induced benefits during operation be not included except in particular cases where a definite showing is made that their inclusion is justified.

6. Inclusion of "public" benefits is justified. We judge that, in the case of municipal water supply in instances where no alternative source is available, public benefits beyond rates charged for water are warranted and recommend further study of this question. In the case of irrigation, we take. exception to the allowance for "settlement opportunity", and recommend that this be treated as a qualitative, "intangibles" factor.

7. As to power, we find that it is proper to assume that, in the absence of a project, power will be supplied from an alternative source, and therefore propose that the total benefit imputed to project power be the cost of power from the next cheapest alternative source. This excludes all benefits of the "stemming" type, specifically those designated in the Manual as B-2, B-3, and C-3. If the B-2 type of benefits (benefits of private distributors of power purchased from a public project) are nevertheless employed, we find them computed on an exaggerated basis and recommend that they be reduced by deducting full allowance for economic return on all capital in accordance with recommendation 5 (a), above.

8. As to qualitative and intangible benefits and costs our study has led us to look toward diminished reliance on quantitative computation and toward attaching greater relative importance to qualitative effects of the alterations in distribution of population, types of community, etc. We therefore suggest that these matters are worth increased attention and study, including sociological aspects. These are, of course, matters that can be described and appraised only by judgment.

Sunday, December 21, 2014

Report of Panel of Consultants on Secondary or Indirect Benefits of Water-Use Projects, Part IIA

Conclusions and Recommendations
A. Introduction

The present panel has been engaged as a group of disinterested students to make an objective appraisal of the disputed procedures for evaluating secondary benefits and costs of Federal water-use projects, on which the Bureau of Reclamation has failed to reach agreement with the other five agencies represented in the Subcommittee on Benefits and Costs. We have been engaged by the Bureau of Reclamation, with the knowledge and approval of the other interested agencies. The personnel of the Bureau have given us the fullest assistance and cooperation, in making available to us the pertinent documents in the case, in presenting to us the wide variety of views, to be found among their members, and in answering questions which have arisen from time to time in the course of our study. The members of the panel are impressed with a deep sense of their responsibility in this difficult question. Able minds, more conversant with specific problems than the members of the panel could hope to become in their necessarily limited study, and exhibiting familiarity with the relevant concepts of economic theory, have with time and effort hammered out a considerable amount of agreement on principles and at least, a compromise on general outlines of procedures; and we should feel presumptuous if we undertook, on much briefer study, to propose disturbing any material part of whatever consensus may have been reached, without imperatively strong reasons. In fact, it appears that, in the various documents that form the record of this case, most if not all of the pertinent theoretical concepts are embodied, in one way or another, but they appear with twists and one-sided applications, which alter the meaning of concepts in ways not unrelated to their pragmatic effects. The positions of majority and minority cannot both be right: real agreement necessitates change of one or the other.

Our conclusions are of two sorts. A few are specific and not far reaching, and could, if approved, be put into effect fairly readily. Other's are based on more fundamental questions as to the economics involved in the procedures, and are so far-reaching as to call for further study, and presumably consultation between the interested agencies, before they could be embodied in working procedures. On certain points, we agree with majority positions, on others with the minority; but on some rather fundamental matters we dissent from both. We take the principle of the "with and without" comparison as controlling, but find that certain limitations on its application have prevented the procedures used from truly reporting the results of such a comparison, which they are supposed to report, or to be attempting to approximate.

We seek a method of determining what projects promises net surplus of national benefits over conditions as they would be without these projects; also of ranking different projects, and different increments of project scope, in order of relative economic justifiability. All parties appear to agree that the basic answer sought is the aggregate of quantitative differences in the national real income, with and without a given project, wherever such differences may occur and whether they are plus or minus; to which should be added consideration of qualitative differences and evaluation of them wherever possible. The inescapable difficulty, even for the quantitative differences, is that, for the ramifying secondary effects, accurate and definitive answers require omniscience. Lacking this, some things can still be measured, but not all the hypothetical effects of the presence or absence of a given project. Something short of measurement is inevitable. Methods of meeting this difficulty are subject to several criteria.

First, similar standards should be applied to different projects, and to both sides of the "with and without" comparison.

Second, these standards should be framed in the light of objectively valid conceptions of the essential cause-and-effect relationships and these conceptions should be kept clear and distinct from compromises of procedure that may be necessitated by limitations of evidence or otherwise. If this is done, a range will appear – in some cases quite a wide range – within which the answer may depend on judgment, without possibility of even relatively precise measurement.

Third, in this situation, without pretending an unreal precision, a different kind of end may be served if formulas can be devised calculated to yield results within the general order of magnitude which judgment suggests. Such formulas would at least make for uniformity and comparability, reducing the scope for the vagaries of personal equation or agency bias. This is in itself a weighty consideration.

Lastly, if at all possible, procedures should be simplified. One of the apparent vices of the present situation is the fact that some of the procedures are so complex and involved that the meaning of what lies behind a benefit-cost ratio is accessible only to a select few, even among. the initiated. This hampers what needs facilitating; namely, proper democratic scrutiny of the proposal of executive agencies. The material involves inescapable complexities and uniformity in handling it requires formulas of some sort, at some stage or stages. Democracy has to rely on technicians in matters inscrutable to the non-specialist, but preferably where the specialist is following a well-authenticated technique. In this case, the disagreements among the specialists are evidence that they do not possess such an authenticated technique, for the results of which a representative government can safely take their word. It needs to be able to tell what they are doing, and what their procedures mean.

All this creates a dilemma difficult to resolve, In this dilemma there appear to be two tenable alternatives, The more drastic method would be to abandon the attempt to measure secondary benefits. Computation would then be reduced to the furnishing of evidence on the basis of which secondary benefits may be appraised by a frank exercise of judgment. The less drastic method is to use formulas calculated to give results that fall within the range of reasonable judgment-estimates, but which are with equal frankness treated as rule of thumb, not as definitive measures.

In the first case, regional offices should furnish statistical evidence prepared under rules that are uniform within a given agency and at least comparable as between agencies. The first judgment-estimates would presumably be made in the central office of each agency, as a means to intra-agency uniformity; but inter-agency comparability and equity would be in the hands of higher authorities, who would need to have the evidence passed up to them in usable form. If this seems too indefinite – and the President's Water Resources Policy Commission has asked for greater definiteness and inter-agency uniformity – there is an arguable case for the view that it is better than spurious definiteness, that final decisions actually use judgment rather than implicitly following benefit-cost ratios calculated by different agencies in different ways, and that the suggested method would tend to implement the ultimate decision with better-prepared evidence than it now has. We see force in this view but we recognise also that the pressure for rules of thumb is strong, and the advantages of more definite uniformity great. We therefore propose continued use of formulae, regarded as rules of thumb, and altered from present Bureau practices, for "stemming" and "induced" benefits; but for some elements we propose that they be left to the exercise of judgment, without attempting quantitative measurement.