"Getting It Wrong"

I don't think Robert Solow liked this book:

Getting it Wrong: Review of Kevin Phillips' Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism, by Robert Solow: Turmoil in the financial market and insecurity in the labor market--we have plenty of both--bring out good and bad books, like good and bad mushrooms after a rain. In the instance before us it is the financial market that is in turmoil, and this is definitely not a good book. The only nice thing I can say about Bad Money is that taking critical aim at our complex, overblown, and now evidently dangerous financial system is a fine idea. The trouble is that Kevin Phillips stays throughout at the superficial level of Chicken Little. Terrible things are happening, and will continue to happen; but despite a certain pretentious hinting at deeper understanding and a few loose references to historical parallels, there is nothing very enlightening to be found in these pages. [...continue reading...]

Comments

[a]

"Bad money" may indeed be a bad book.

Still, the Econ 101 argument, which Solow uses ("Every elementary economics textbook..."), falls a bit flat since it would appear that we are in a big economic doo-doo and economists are - to be polite - flailing at solutions and even at recognizing what were the problems. Solow writes, "It is true that our failure properly to regulate modern financial engineering, together with the pursuit of a thoughtless and reckless foreign policy, has damaged our economy and weakened our position in the world." It would seem that the bad economic times we are facing, is due only to a lack of regulation. Maybe. Maybe it's also a question of trusting economic theory too much and supposing monetary and fiscal engineering made it possible to avoid recessions at little or not cost.

[hari]

I think the review is valid.

It's not enough just to criticize and/or promote your *infinite* wisdom (however rotten to the core!) of what's right and/or wrong. More relevant is to find the *casus belli* and identify them for *others* with knowledge in the field to follow-up with critical analyses and comments.

Otherwise we cannot promote a just and proper understanding of our critical (globalized) economic times, me thinks.

[odograph]

I think Kevin Philips finds things that are true, and overplays them in increasingly bad books. That's sad because the simple truths can be attacked by way of the books. (One example of a simple Philips truth: that say oil dependence and an Evangelical Republican party interact in interesting ways.)

"mission from God" anybody?

[bakho]

"Wealth and Democracy" was an interesting read because of its historical perspective and worth reading even if you don't agree with all the conclusions.

Solow makes me not want to spend time with this one, even though Phillips is usually meticulous in documenting his sources.

[paine]

"There is no evidence that God ever intended the United States of America to have a higher per capita income than the rest of the world for eternity"

nice line
but why in the transition
do we the regular people
have to allow
our nasty border less boundless
corporate elites
hyper-skew our national income stream ???

the rest of the world catching up
shouldn't have to mean
we gotta
make the income share ever worse
for the domestic jobholding
majority of us

solow still fails to address fact one
in my estimation

the wage structure here in north america
has been and still is deforming

maybe as joe stig suggests else where
-- and solow implies here ---
in a global system
maybe "we americans " can "specialize"
in producing --and owning -- intellectual property

that might pay for our product imports
so long as its combined with
our leading role in various manifestations
of hi fi loss-vegas

maybe like our globe leading farm sec
our once leading factory sec can shrink
its employment level to
a small portion of the job force
but hey shrinking the job force thru tech-prog is one thing
we still produce the biggest earth wide
share of corn and beef
by contrast
we're headed toward not producing at all
the spark plugs and curcuit boards
we once world dominatingly produced in the ike era

its thanks to the cio
households earning their keep
thru factory unskilled production line wages
went from below national average
to above averagein what ??
20 years ???

just losing these jobs to of shoring
means a net loss of wage rate
for our native born
skill less zillions

to answer
we can "specialize" in high skill jobs
ie
take more then our per capita share of the planet's
high skill jobs
may or may not be possible
-- i think its not ---

but who is who dares say we can
--even if we have the native raw talent on hand ---
"produce these high skilled job fillers
"cheaper" then we can import them.....

importing jobsters
is a savagely ironic substitute
for slowing the exportation of production

[Bruce Wilder]

Robert Solow: "It is true that our failure properly to regulate modern financial engineering, together with the pursuit of a thoughtless and reckless foreign policy, has damaged our economy and weakened our position in the world. Phillips deserves some credit for banging away at this point. It is too bad that he has no taste for genuine analysis."

Robert Solow, Nobel Laureate economist, reads Kevin Phillips, political scientist, and finds no interesting economic analysis. So?

Economists enter the political discourse all the time with pious homilies devoid of actual analysis -- this blog is chock full of them. "an attempt to make adjectives sound like analysis" would be complimentary, applied to many of the screeds turned out under the imprimatur of the Federal Reserve or the NBER working paper series; the op-ed musings of Greg Mankiw or any number of Hoover Institution refugees don't even pretend to be analysis.

So, I wonder what kind of "analysis" Solow might have been missing. Was it really just an Econ 101 brief on financial institutions as intermediaries? Maybe, he thought Phillips should have leavened his book with pontifications about risk and surprise? Or, Solow was hoping for an exhaustive, equilibrium calculation of optimal financial sector size for the U.S.?

As far as I can tell, Solow is just being a pompous, ridiculous fool.

[Winslow R.]

Solow needs to work on this.

"The first function of the financial system is to "intermediate" in this process: to collect the savings in many forms--bank accounts, mutual funds, insurance-company reserves, direct purchases of stocks--and to allocate it to the firms and other entities that seem to have the most profitable ways to use it to build real capital."

Banks CREATE deposits ('savings') they don't just collect them. Banks, lacking regulation, create deposits in an unlimited fashion hence our current financial crisis. Bank loans are not 'saving' constrained.

[Paul G. Brown]

I'm left to shrug.

I feel I have a better handle on the world having read Phillips' book, and an even better handle having read Solow's review.

Sure - Phillips doesn't talk about solutions. To that extent the book's incomplete. But a 'bad book'? It's not as though what he wrote distorted anything, and Solow doesn't claim that he does. Upton Sinclair wasn't an agricultural economist or slaughterhouse architect, either. George Orwell's expertise as a dishwasher wasn't really the point.

Phillps' book is meant to inform and motivate citizens of this here Republic. Solow's focus is on technical solutions which will -- of course -- need to be enacted through the political process.

[anon/portly]

Bruce Wilder:

"Robert Solow, Nobel Laureate economist, reads Kevin Phillips, political scientist, and finds no interesting economic analysis. So? .... So, I wonder what kind of "analysis" Solow might have been missing...."

Solow discusses (by my count) five of Phillips' issues: (1) the financial sector; (2) CPI; (3) oil prices; (4) the value of the dollar; (5) America's place in the world. His criticisms are not vague, as BW suggests, but quite specific on each of these. Here is how Solow introduces his discussions of issues (1), (2) and (4):

(1) "But there is no discussion in Phillips's book of any constructive function that a right-sized financial sector would perform, so that the reader might be able to understand just how much is too much."

(2) "One chapter is largely given over to an attack on the integrity--not the accuracy but the integrity--of the consumer price index. This would be scurrilous if it were not so silly. Phillips does not seem to understand what a consumer price index is."

(4) "Then--this is a book about bad money, after all--Phillips turns to the dollar, and a certain amount of confusion descends. Some of it rests on the almost universal bad habit of treating the high exchange value of the dollar--a "strong" dollar--as a matter of national pride."

I would say, with respect to point (1), that Solow does not want Phillips to include anything like BW's "Econ 101 brief on financial institutions as intermediaries" or "an exhaustive, equilibrium calculation of optimal financial sector size for the U.S." I think he just wants Phillips to show some understanding of what the financial sector does and what parts of it are useful and therefore to what extent it might be a good idea to implement policies aimed at reducing its size. Perhaps Solow feels that it's pointless to write about the issue without making this clear.

With respect to point (2), I think Solow thinks Phillips should demonstrate a better understanding of the purposes and methodology of the CPI before criticizing it.

With respect to point (4), I think Solow thinks Phillips should demonstrate a better understanding of the incentives both the U.S. and other countries face in taking various actions that affect the exchange rate of the U.S. dollar.

When Solow says Phillips lacks a "taste for genuine analysis," I don't think he means that Phillips is unable to contribute new analytical insights on these issues. I think he means Phillips is unwilling to assimilate into his thinking even the most basic of analytical insights that others have made before him. Perhaps therefore Solow feels that Phillips' treatise becomes just an expression of prejudice, rather than something that can help people increase their understanding of the issues.

"As far as I can tell, Solow is just being a pompous, ridiculous fool."

Behind this statement there must be an analysis of Solow's specific points and/or style that demonstrates his pomposity and foolishness. Why hide that candle under a bushel?

[paine]

bruce sneers:

"Solow was hoping for an exhaustive, equilibrium calculation of optimal financial sector size for the U.S.?

As far as I can tell, Solow is just being a pompous, ridiculous fool."

go for it baby

perhaps nautical bob
jaunty wind sailor that he is
grows tired of the new century and its doldrums
and felt
a fiendish need
to savage a ..... press goat

[Bruce Wilder]

I'm sorry to disagree with you, anon/portly, but I found Solow's five points of criticism, as you enumerated them, to be aggressively framed in introduction, but flatulent in execution.

In the end, Solow concedes Phillips' thesis, leaving me wondering what the whole review was trying to say.

Just a note on Solow and price indexing: "a" consumer price index "is" not any particular, theoretically well-defined one thing. The theory of economic indexing suggests that it could be any of quite a broad range of imperfect measures, measuring different things in different ways. There is no single, right design or definition. And, the actual CPI and related indices have been periodically redefined with an eye focused on the political consequences. Phillips, the political scientist, highlights the politics; maybe, Phillips should be more conversant with the economic theory, but, then, maybe, the economists should be better informed and more honest about the politics.

[paine]

anon p

solow oughta pick on some one his own brain size

if i were to attack this here
three sheets flying bobkrieg....

i'd start by noticing
bob himself don't give us a go
on what's at stake when we run
a north /south over valued dollar operation
at the fed for two decades
and how in the end
its not the han red bankers
that make this good paying job stripper a go go go
but the hyper profits made on the intersection
of wall street and trans nat ave

by de industrializing america the beautiful
the high and mighty north/south dollar
creates a mid term trans pacific profit slurry
the usual limited liability tower trolls
over here at this end
can make out
like a cyclops among cub scouts

as to his sickening rendition
of the peculiar funds transfer mechanism
we worship as "savings/investment"

why yet another spell bound rapsode
to that homely but holy ghost of privateer capitalism

he'd have served us all better
if he'd demolished that wonderville mirage
and talked about the dangerously hyde like side of hi fi
or about the secret elixir
Senior Win so undauntingly brings to our notice
AS OPPORTUNITY PRESENTS ITSELF

credit creation lies behind
the mushroom cloud
of toxic gambles apon gambles
solow himself draws so clearly for us
without fully imploding its pretenses
to social welfare enhancement
instead he wacks poor kevin
albeit in a lax and half hearted way

hey
bob's had better moments of high polemic
but like most kold war liberals
its the rad left
that really gets him jazzercised
not a free lancing fourth estate hack

[paine]

oh ya

the oil price patch is further evidence
guys like robert S phd
emeritus professor of the neoclassical synthesis
like most polly anna confectionaries
when the goin gets dirty enough ....
" just can't handle the truth"

[paine]

sailor bob:

"The current run-up in (oil)price may contain a little speculative froth "

imagine even to the precise greenstainian wording

[paine]

now you got me goin

the tripe about lowered cost of financing homes
horror show fraud

the lot inflation triggered by this "inovative " mechanism
did nothoing of the kind

imagine a convenient stretch pay credit plan
that raised the price tag as it became more generous
and you got that side of the gimmick clear

okay so you need to do a little "on site " digging
(analysis ?)
not a quick fly over at ten thousand feet
in the famous red white and blue
"neoclassical synthesis " good time blimp

[paine]

hell this left handed put down
by master robert of MIT
is shakier
then floor beams full of termites

[Bruce Wilder]

I don't think Paine liked this review.

[paine]

no i won't touch the index question
i leave that tedium
to minds more rugged
and less paranoid

hell woudn't it be nice
if all UNCLE's numbers
are just an intricate curtain of lies
like the stats pumped out during
THE GREAT LEAP FORWARD

[paine]

come to think of it bruce...i guess i don't

[Hedonically Better]

Sollow appears to believe that the OER (Owner's Equivalent Rent) method of determining housing costs is clearly "right" and house prices can be ignored. This is not obviously true.

The OER method assumes that home ownership costs (purchase price, mortgage interest rates, etc.) and rents will always track together. For better or worse, this is not true.

For some time now house prices / mortgage rates have risen faster (until recently, of course) than rents. Using rents is misleading because most Americans do not rent their homes.

Let me try to use an analogy. Assume that steak and chicken are partial substitutes. You could track meat prices by looking at chicken alone. However, if steak prices are soaring and most Americans buy steak, than using chicken prices as a proxy for meat is misleading at best.

In this case, the reality is that roughly 2/3rds of Americans purchase homes. If the combination of purchase prices and mortgage interest rates is rising, that reality should be reflected in the CPI even if (particularly if) rents are not keeping pace.

To give you an idea of how strange the OER method is, the BLS statistics show that housing in California is only modestly more expensive than the rest of the U.S. Does anyone actually believe that? However, it is a consequence of the OER approach.

The CPI has other problems as well. Many economists believe that hedonic improvements have been badly overstated for years. This has biased the CPI downwards in a manner that may be seriously inaccurate. For example, PC improvements may have been overstated systematically. See "An inflation debate brews over intangibles at the mall" (http://www.post-gazette.com/pg/05129/501565.stm) . A useful quote

"Bill Gross, head of the world's largest bond fund, Pimco, caused a stir last fall by proclaiming that the way the CPI is calculated amounts to a "con job" by the government aimed at concealing the true rate of inflation. A key culprit, he said, was the CPI's growing reliance on hedonics. Mr. Gross, who has other complaints about how inflation is tracked, estimates the CPI really is one percentage point higher than official figures suggest"

See also "Inflation, Hedonics, and How Silicon Valley May Have Wrecked Our Monetary Policy" (http://blog.adamnash.com/2008/02/27/inflation-hedonics-and-how-silicon-valley-may-have-wrecked-our-monetary-policy/)

Kevin Phillips may not be sophisticated enough to present his arguments in a manner than a professional economist would approve of. Conversely he may be targeting a less erudite audience. However, that doesn't make him wrong. Indeed, the notion that the substitution of a financial economy for the real one is a mark of national decline is well rooted in modern history.

[anon/portly]

paine:

"[quoting Solow] 'There is no evidence that God ever intended the United States of America to have a higher per capita income than the rest of the world for eternity'

nice line
....
solow still fails to address fact one
in my estimation

the wage structure here in north america
has been and still is deforming"

In the very next line of Solow's review, Solow specifically mentions "damage" to the economy. This could and I suspect does encompass wage issues. Perhaps the reason Solow doesn't delve into this in his review of Phillips' book is that the subject of his book review is Phillips' book, not Solow's take on all the economic issues.

However, by composing the following poem....

solow
wage

....in the "Google Search" box helpfully provided on this site, the very first thing that comes up is a post from January 17, 2006 entitled "Robert Solow: An Economy That Doesn't Distribute Gains Widely is 'Poorly Performing.'"
The linked article only quotes Solow and is not by him, but he has addressed the stagnant wage problem, if only to a Bloomberg reporter.

http://www.bloomberg.com/apps/news?pid=71000001&sid=azvCEhXtl1g0&refer=fed_watch

[anon/portly]

"I'm sorry to disagree with you, anon/portly, but I found Solow's five points of criticism, as you enumerated them, to be aggressively framed in introduction, but flatulent in execution."

Well, surely you can explicate at least one particularly gassy or smelly passage, to make us more intimate with your critique.

"In the end, Solow concedes Phillips' thesis, leaving me wondering what the whole review was trying to say."

I don't think he concedes Phillips' thesis. He summarizes Phillips' last chapter as saying that "hubristic madness is handing the world economy over from America (and Europe?) to Asia, with incalculable consequences," and then he disagrees with that idea.

He does say "Phillips deserves some credit for banging away at" the idea of financial regulation and foreign policy damaging the economy, but I think the ultimate point of his review is that Phillips, because he doesn't properly understanding the things he's writing about, is ultimately not an effective or useful commentator.

Maybe the review is trying to say that Phillips deserves some credit for identifying the problem, but little or no credit for identifying the solution.

[paine]

anon
its the analysis of causal factors behind the deformaion of the wage structure that loops back into
one of the reviews topics...the dollars forex rate
and tha then loopps by analysis into the functions real and pretend of the hi fi sector

one of which is toallow the asians to pin their money to th dollar
and continue to batter our industrial sector
along with battering euro zoners too of course especially when the hi fi ers
"attempt " to correct our trade balance
by raising the euros dollar rate
when of course its our exchanges with the asians
and the oilers so hideously pegging their money
that are the source of the problem
over the last 20 years or so
both north america and western europe
have taken turns
absorbing the bigger blow from the south trade
by dancing our currency exchange rates
around each other

this is a north south scam
and must be settled by north south adjustments

now since solow is reviewing a book on our position in the world
surely our dollar policy warrents further analysis
but i bet free trader bob
the cosmopolite fears the truth here
with its yahoo protectionist similitude

after all ask any tenured prof
whether the emerging world's toilers
or our own homer simpson wagiate oughta gain from trade
the answer would be obvious eh ???

and even if his macro assures him
the whole system if so impelled
could solve this not as an either or
us or chinese wages
but as a both

he's not about to chance the results of unleashing the truth
as the late john k g would say
selling forex policy ie devaluation
to american plebs and proles
"is like selling whiskey to the iroquois"

[piglet]

Bruce: "Economists enter the political discourse all the time with pious homilies devoid of actual analysis -- this blog is chock full of them."

Amen.

Re the book review, I have read Phillips' article in Harper's which explains the CPI and similar issues. I think Solow's aggressive critique - "One chapter is largely given over to an attack on the integrity--not the accuracy but the integrity--of the consumer price index. This would be scurrilous if it were not so silly. Phillips does not seem to understand what a consumer price index is." - indeed makes him lok like a fool. Phillips clearly does understand the CPI and successfully attacks both its integrity and the accuracy. I won't read Solow's full review because it's a bit long but the quotes you provided, anon, are not reassuring.

[Lots of Straw]

That pretty much shows you don't get the CPI either.

You can read up on the defense of these statistics here

http://www.bls.gov/opub/mlr/2008/08/art1full.pdf

and here

http://www.bls.gov/cpi/cpiqa.htm

[and if you don't read them both and understand them thoroughly, please just be quiet, you don't have the basis you need to say anything] Criticisms made from ignorance often sound appealing, but they are devoid of substance. The attacks on economists are often pretty humurous and, to those who have any training, have just the opposite of the intended effect - it makes you look rather silly. But most people don't have the knowledge to see that, so occasionally someone needs to point it out.

Have your fun amongst yourselves, but I hope nobody is taking it too seriousy. As a recent post here shows, sometimes people don't even know what the statistics are used for and they look like idiots as they try to criticize. I know you think you are scoring points, but it's all pretty baseless - so go find out what you need to know before spouting off, okay?

[Mark Thoma]

I got an email from one of the authors of the study those links discuss, and was about to post on this. I think Michael Mandel at BusinessWeek also has a post up on this.

[Bruce Wilder]

a/p: "surely you can explicate at least one particularly gassy or smelly passage"

I think all five points got pretty gassy pretty fast.

Solow meanders through a pointless recitation of finance at intermediating savings and investment -- talk about wading thru the shallows! -- and then asks, rather pedantically I think, "Could we redesign the mechanism to achieve most of the benefits of a broader supply of mortgage capital while sharply limiting the scope for predation and instability? This question calls for serious thought . . ."

Serious thought, indeed. I have no doubt Phillips, a political journalist not an economist, does not offer any such serious thought, but I will wager that Phillips has noticed something that has escaped MIT's scholarly Dr. Pangloss. To wit, "the mechanism" has been redesigned, to increase the scope for predation and instability. Hence, the recent predation and the present instability. Surely, this is what journalist Phillips is trying to report. I am sure "deep thought" went into the redesign. Phil Gramm is famous for his deep thought. Too bad the news wasn't posted to Cambridge sooner, although Solow does seem to have read Margaret Blair (who, I can assure, was not among the first to notice escalating compensation on Wall Street).

Solow gets himself into a high dudgeon over price indexes. I have heard Phillips on the price index question, and he's not going to impress any economist. But, as a journalist, he's also not wrong. The CPI has been re-defined, with a sharp eye on the political consequences, and its integrity has been compromised as a result. This is a fact, which a journalist, like Phillips, should be reporting, and an economists, like Solow, should not be obscuring.

In another moment of high dudgeon and the assumption of superior technical knowledge, Solow asserts: "Phillips criticizes National Income and Product Accounts because they do not prominently display figures on the sharply rising volume of private debt. But this lapse is owed to the fact that the National Income and Product Accounts are about, well, national income and product. They are more like an income statement, and certainly not like a balance sheet."

Again, not taking a brief for Phillips or his particular critique, but, sorry, Professor Solow, Income Statements and Balance Sheets are not radically different things -- they are different presentations of the same double-entry bookkeeping data. An income statement reconciles two balance sheets, reporting on the delta between two endpoint snapshots. The National Product and Income Accounts are part of a double-entry bookkeeping system exactly analogous to the one that produces income statements and balance sheets for a business. In ladling on the sarcasm, Professor Solow makes exactly the kind of ignoramus error he accuses the hapless Phillips of. A very gassy performance, indeed.

Whatever the merits of Phillips' book as either political big-picture reporting, or meso-economic survey, Solow is being a jerk.

[Deflated Pretensions]

Lots of Straw, alright so I'm not an economist and don't know everything the CPI is used for. I do know it is a widely quoted statistic that is a presented to the public at large by the media and politicians to give a sense of how the economy is doing. I also know it's used to help determine how much of a raise I get every year. My rent hasn't gone up much at all in the last 5 years, but with the income I make now I could have afforded to buy a house 5 years ago and can't now. In 1981, when the index was calculated based on the cost of house not owner's equivalent rent, it's possible I may have received salary increases based on the CPI that enabled me to by that house. That didn't happen this time. Sure, I can still rent, but so what? That fact that the index was changed after a bout with double digit inflation in the early '80s seems like good evidence to me that there may have been a political push behind it. To you and other economists the CPI might be a highly technical statistic intended to measure highly technical things. To normal people, its a measure of how well they are doing. If the index is calculated one way in one decade and says inflation is 12% and calculated another way in another decade and says inflation is 4% but the actual cost people pay for a house (pardon me, asset) in both decades is the same, well, that messes with peoples minds. And that makes criticism of the index from Kevin Phelps and other noneconomic ignoramouses like myself legitimate.

[anon/portly]

"Solow meanders through a pointless recitation of finance at intermediating savings and investment -- talk about wading thru the shallows!"

Solow says he's wading through the shallows too: "[e]very elementary economics textbook explains to the beginning student...." It's not much of a criticism when the writer has conceded your point in advance. And as to the necessity, maybe we can agree to disagree on what is appropriate in the NYROB.

"I have no doubt Phillips, a political journalist not an economist, does not offer any such serious thought, but I will wager that Phillips has noticed something that has escaped MIT's scholarly Dr. Pangloss. To wit, "the mechanism" has been redesigned, to increase the scope for predation and instability. Hence, the recent predation and the present instability. Surely, this is what journalist Phillips is trying to report."

Isn't pointing out this problem what Solow is giving Phillips credit for? Whatever the substantive disagreement between you, Phillips and Solow is supposed to be, I don't see it.

"The CPI has been re-defined, with a sharp eye on the political consequences, and its integrity has been compromised as a result. This is a fact, which a journalist, like Phillips, should be reporting, and an economists, like Solow, should not be obscuring."

See the BLS thing MT has helpfully posted....

"Again, not taking a brief for Phillips or his particular critique, but, sorry, Professor Solow, Income Statements and Balance Sheets are not radically different things -- they are different presentations of the same double-entry bookkeeping data."

Like you say, balance sheets and income statements are different things, and Solow correctly points out that the National Income accounts are like the latter. I don't see a disagreement between you and Solow here either, and you don't address the one between Solow and Phillips.

I do see one substantive difference between the worldviews of Wilder and Solow - one prefers explanations in which the role of bad actors with illicit motives is emphasized, and one does not. I think instead of obscuring your criticisms of Solow by referring to him as "flatulent" or "pompous," you should more pointedly criticize him for being naive or an apologist or a useful tool or whatever. Then remind us of the documentary evidence and so on.

[Lafayette]

Fool me once ...

paine: in a global system maybe "we americans " can "specialize" in producing --and owning -- intellectual property

If this means somehow cornering the market for intellectual property, then I don't think that is going to happen.

If this means making of our workforce Information Workers, that is, more brain-work orientated than brawn-work, then that remains a distinct possibility.

Let's remember, in the structure of how the American economy generates GDP, not all jobs are shipping off to China. Brawn-power manufacturing in heavy machine industries will remain, because it is a combination of brain (conception) work, but also brawn-work (manufacturing). What keeps manufacturing closer to home is the after-sales service and somewhat shipping costs.

I wont get concerned if American electronic companies design their products in the US and shop them out for construction elsewhere. I will get concerned if Caterpillar does the same for its machinery.

Our focus should remain on where unemployment hurts the most presently, namely, unskilled labor. It is intolerable that we should continue to supply unskilled labor to the labor market at minimum wage jobs. Employment precariousness will only increase in the future for this class of worker.

This problem can only be rectified by a tightened discipline in secondary school education such that no child is really, truly left behind - and all graduate with a High School diploma. From there, it depends upon their interests and native talents to pick up a tertiary education that suits them.

Tertiary level education will not happen automatically. The student needs guidance from the third year of secondary schooling to orientate them. And, the tertiary level schooling must not cost an arm and leg to undertake.

Those objectives, in terms of Secondary and Tertiary Education, can be realized only if the state and Federal government share the financial burden that will be necessary. It will be a long road to hoe, since the rewards are not immediate but they are inevitable.

From where will the resources come? The means for a bona fide National Education Program can only come from increases in tax revenues (and perhaps serious reductions in Defense spending). So, raising taxes is a slam-dunk option that is increasingly inescapable. The Replicants promising otherwise, that is, to cut taxes, are also promising a "do nothing education policy".

Lead-head was the "education president" wasn't he? Fool me once, shame on you. Fool me twice, shame on me.

[Bruce Wilder]

anon/portly: "It's not much of a criticism when the writer has conceded your point in advance."

Solow, unfortunately, did not concede my point, which was not that his discursion on intermediation was shallow; my criticism was that his discursion was pointless. It led nowhere. If Solow has an argument for exactly how large the finance sector should be, he should offer it; that neither Solow nor Phillips nor any other economist has an answer is neither here nor there. Phillips can hardly be expected to report economics the economists haven't created.

By the way, Solow's review was published in the The New Republic, not the New York Review of Books.

anon/portly: "Like you say, balance sheets and income statements are different things, and Solow correctly points out that the National Income accounts are like the latter."

NO! NO! NO!

I explained Solow's error. It is an error, an elementary, fundamental error. What Solow wrote was utterly wrong and misleading.

says...

"There is no evidence that God ever intended the United States of America to have a higher per capita income than the rest of the world for eternity."

But this is exactly what we *are* promised, if not by God, then at least by the Invisible Hand. After all, aren't we following neo-classical economic policies---- free trade, free markets, no subsidies---- precisely because they are supposed to provide us with the best possible growth? And if we start with a higher per capita income and have the best growth possible then surely we will have higher per capita income than all these quasi-socialist, market supressing dirigist regimes for all eternity.

Income convergence will, of course, tend to bring other nation's per capita income closer. But they should not be able to actually pass us.

Unless of course, free trade does not necessarily result in optimal growth. After all, a priori it doesn't seem to be particularly efficient to ship raw materials half-way around the world, then ship the products made with them back half-way around the world. But in that case, why the hell are we doing it?

[anon/portly]

"Solow, unfortunately, did not concede my point, which was not that his discursion on intermediation was shallow; my criticism was that his discursion was pointless."

Well, you fooled me with that "...wading thru the shallows!" line. I thought you were saying it was pointless because it was too obvious or basic.

"If Solow has an argument for exactly how large the finance sector should be, he should offer it; that neither Solow nor Phillips nor any other economist has an answer is neither here nor there."

Solow is reviewing Phillips' book, not writing his own. And Solow's point that Phillips lacks a discussion of this topic is not invalidated by Solow not having all the answers himself. It's either a good point or a bad point regardless.

"I explained Solow's error. It is an error, an elementary, fundamental error. What Solow wrote was utterly wrong and misleading."

Well, sorry, I guess I still don't understand your explanation, which I think is this:

"...Income Statements and Balance Sheets are not radically different things -- they are different presentations of the same double-entry bookkeeping data. An income statement reconciles two balance sheets, reporting on the delta between two endpoint snapshots."

When Solow says the National Income accounts are like an income statement and not like a balance sheet, I don't see how the statement that an "income statement reconciles two balance sheets" leads to the result that Solow is "utterly wrong and misleading."

If Solow is wrong, then NI accounts are either (1) not like an income statement and like a balance sheet; or (2) like neither an income statement or a balance sheet; or (3) like both an income statement and a balance sheet; or (4) "sort of" like and/or unlike one or the other. I don't know which of these alternatives you're claiming.

ISTM if I look at a company's income statement it will tell me about revenues and costs - spending flows. The income statement will, and the balance sheet will not, tell me about these flows. Meanwhile a balance sheet will tell me about assets and liabilities, and a company's debt is a liability. The income statement won't tell me how debt the company has amassed, and the balance sheet will.

Or is all of that wrong? I admit to having a poor grasp of accounting principles.

[VG]

I also think Solow is unfair in criticizing Bad Money for its title. Gresham's Law is actually a pretty good explanation for the causes of the financial crisis. Bad money, in the form of overvalued securitized assets has almost driven good money (commodities and high grade assets) off the market, by increasing their prices.

When you Securitize assets you convert them to money. If you convert them into more money than they are worth then you are essentially creating a new class of bad money---- the Z-grade tranches that you pretend are B-grade. And naturally you would use the money thus created to buy A-grade tranches or other assets that would actually have some inherent value. IE, you would spend your bad money to buy good money.