links for 2008-12-03

• Wages and employment in the 30s - Paul Krugman
• Changes in money wages - Marginal Revolution
• How Comcast Controls Sony’s Internet TV Plans - NYTimes.com
• Coal Mining Debris Rule Is Approved - NYTimes.com
• Q - Felix Salmon
• Message to Peggy Noonan: Open your eyes! - Andrew Leonard
• How to Foil "Phishing" Scams - Scientific American
• U.S. Lags In Providing College Access - washingtonpost.com
• Global imbalances threaten the survival of liberal trade - Martin Wolf
• Automakers Won't Make Fuel-Efficient Cars - Robert Reich
• A rose by any other name (VSL) - Environmental Economics
• Obama’s Most Interesting Pick (Romer) - Ed Glaeser
• Why is real GDP growing in a recession? - BusinessWeek
• Was the Glass-Steagall repeal a colossal mistake? - Justin Fox
• John Maynard Keynes - Robert Reich
• Will the Euro Survive the Current Crisis? - Martin Feldstein
• How to avoid the horrors of ‘stag-deflation’ - Nouriel Roubini

Comments

[wjd123]

Countries with large external surpluses import demand from the rest of the world. In a deep recession, this is a “beggar-my-neighbour” policy. It makes impossible the necessary combination of global rebalancing with sustained aggregate demand. John Maynard Keynes argued just this when negotiating the post-second world war order.

In short, if the world economy is to get through this crisis in reasonable shape, creditworthy surplus countries must expand domestic demand relative to potential output. How they achieve this outcome is up to them. But only in this way can the deficit countries realistically hope to avoid spending themselves into bankruptcy.

Some argue that an attempt by countries with external deficits to promote export-led growth, via exchange-rate depreciation, is a beggar-my-neighbour policy. This is the reverse of the truth. It is a policy aimed at returning to balance. The beggar-my-neighbour policy is for countries with huge external surpluses to allow a collapse in domestic demand. They are then exporting unemployment. If the countries with massive surpluses allow this to occur they cannot be surprised if deficit countries even resort to protectionist measures.

We are all in the world economy together. Surplus countries must willingly accommodate necessary adjustments by deficit countries. If they decide to sit on the sidelines, while insisting that deficit countries deserve what is happening to them, they must prepare for dire results.--Martin Wolf

I think that this is a phenomenon that economist have to address. If Obama's fiscal stimulus package ends up "exporting unemployment" count me out. Raise up the tariff barriers.

Economist can't keep yelling free trade, free trade into the face of this imbalance while we are spending trillions to staunch a recession.

[oops]

re: college access

i'd like to see less naming rights to stadiums being sold to wealthy alums and more scholarships. change the tax code!

[Farrar]

Mark,

Your pages load more and more slowly, comments get lost, and now my browser (the newest Safari0 gets stuck in permanent loading mode.

Meanwhile I notice that your sidebar is probably the longest in the blogging business.
Don't you think they are maybe too ambitious for the typepad infrastructure?

[Farrar]

Joe Nocera's Anonymous Banker gives us inside info on why small businesses (usually the biggest source of jobs) aren't getting loans.

http://executivesuite.blogs.nytimes.com/2008/12/02/anonymous-banker-why-are-sba-loans-disappearing/

[kharris]

In response to the BW article on rising GDP, Spencer suggested (obliquely) that Mandel was confused by the treatment of imports in the goods side of GDP, and that if Mandel accounted for imports properly, he would realize that his explanation doesn't hold up. Mandel responded that Spencer is "right and wrong" and made some vague statement about netting imports. The data source Mandel cites doesn't clarify the issue. Anybody know whose right (Spencer?)?

[kharris]

"who's" Sheesh.

[anne]

[The blog is elegant in simplicity, and there is no problem with speed in either Firefox or Explorer. The blog is wonderfully fast. There has been however for several days a problem introduced by Typepad in which on both Explorer and Firefox comments are being separated on threads and cannot be reached by clicking on the names in the side index. The result is that comments listed after the Typepad break are not read. The problem is entirely with Typepad, and is entirely new.]

[anne]

http://www.princeton.edu/~pkrugman/nominal_wage.pdf

December 2, 2008

Notes on Nominal Wages and Employment
By Paul Krugman

Keynes's chapter on money-wages and employment is hard for modern economists to read. So I thought it might be helpful to restate it in terms of the standard textbook aggregate-demand-aggregate-supply framework.

We start with a production function, determining output as a function of employment:

Y = F(N)

With competitive markets, workers will be hired up to the point at which the real wage equals the marginal product of labor. (In the real world things are more complicated, but never mind.) If workers' contracts directly determined real wages, that would be the end of the story. But if workers negotiate a nominal wage instead, what we get is an aggregate supply curve that depends on the ratio of the aggregate price level to the wage rate:

Y = S(P/W)

Our standard model then says that macroeconomic equilibrium is determined by the intersection of this AS curve with an AD curve, representing the demand side of the economy. So we get a diagram like this:

[Diagram]

Now suppose that the evil New Deal pushes up nominal wages. This shifts the AS curve up, which leads to a higher price level and lower output:

[Diagram]

And that's the story as people like Amity Shlaes tell it, although probably without really understanding the logic.

But what is the crucial feature of this story? It requires that the aggregate demand curve be downward sloping. And why should that be true?

Well, in normal times the AD curve slopes down, we think, because other things equal a higher price level increases the demand for money, which drives up interest rates, which reduces desired spending. (In terms of IS-LM analysis, higher P leads to lower M/P which shifts LM left.)

But in liquidity trap conditions, the interest rate isn't affected at the margin by either the supply or the demand for money – it's hard up against the zero bound. And as a result the usual explanation for the downward slope of the AD curve doesn't work. You can appeal to the Pigou effect, I guess – but against that you have to put Fisherian debt deflation. In a liquidity trap, the AD curve is at least as likely to be upward-sloping as it is to be downward-sloping.

And in the mid-1930s America was very much in a liquidity trap, with the interest rate on 3-month T-bills * only 0.14 percent.

Suppose that the AD curve is vertical. Then the picture looks like this:

[Diagram]

And there's no adverse effect at all of the wage increase on output.

The key point, then, is that the reality of a liquidity trap in the 1930s has crucial implications for what we think about the effects of policies like the National Industrial Recovery Act. People who assert that New Deal support for wages made the Depression much worse aren't thinking it through. They're implicitly assuming – not demonstrating – that the AD curve had a "normal" slope, even in the depths of the Depression. But it didn't.

* http://www.census.gov/statab/hist/HS-39.pdf

[anne]

http://www.economagic.com/em-cgi/data.exe/fedbog/tbaa3m
http://www.economagic.com/em-cgi/data.exe/fedbog/tbsm3m

2008

Interest Rates on 3-month Treasury Bills, 1931-1960

Year, Month, Interest Rate

1931 01 ( 0.95%)
1931 07 ( 0.48) Low
1931 12 ( 3.25) High

1932 01 ( 2.68) High
1932 07 ( 0.42)
1932 12 ( 0.08) Low

1933 01 ( 0.21)
1933 03 ( 2.29) High
1933 07 ( 0.37)
1933 09 ( 0.10) Low

1934 01 ( 0.72)
1934 07 ( 0.15)

1935 01 ( 0.20)
1935 07 ( 0.15)

1936 01 ( 0.20)
1936 07 ( 0.15)
1936 11 ( 0.11)

1937 01 ( 0.17)
1937 04 ( 0.56) High
1937 07 ( 0.28)
1937 11 ( 0.09)

1938 01 ( 0.10)
1938 07 ( 0.07)
1938 12 ( 0.03)

1939 01 ( 0.03)
1939 07 ( 0.04)
1939 09 ( 0.14)

1940 01 ( 0.01) Low
1940 06 ( 0.10)
1940 07 ( 0.05)

1941 01 ( 0.02)
1941 07 ( 0.12)
1941 12 ( 0.33)

[Liquidity trap.]

[anne]

http://www.usinflationcalculator.com/inflation/historical-inflation-rates/

2008

Inflation Rate, 1929-1945
(Consumer Price Index)

1929 ( 0.0%) Hoover era, contraction begins

1930 (- 2.3)
1931 (- 9.0)
1932 (- 9.9)
1933 (- 5.1) Roosevelt era, contraction ends
1934 ( 3.1)

1935 ( 2.2)
1936 ( 1.5)
1937 ( 3.6) Recession begins, May
1938 (- 2.1) Recession ends, June
1939 (- 1.4)

1940 ( 0.7)
1941 ( 5.0)

[Liquidity trap bond market conditions persisted even when deflation ended in 1934.]

[anne]

http://angryarab.blogspot.com/2008/12/thomas-friedman-is-willing-not-only-to.html

December 3, 2008

Thomas Friedman is willing not only to prove his ignorance of world affairs on regular basis but he also is undisguised in his arrogance. "Who in the Muslim world, who in Pakistan, is ready to take to the streets to protest the mass murders of real people, not cartoon characters, right next door in Mumbai?" What kind of question is that? Why should the Muslims feel as if they are responsible? Would he ask Who in the American world is ready to take to the streets to protest the mass murders of real Iraqi and Afghan people by US BOMBS AND ROCKETS? Is he willing to ask: Who in Israel is willing to take to the streets to protest the mass murders of real people in Lebanon and Palestine by Israeli bombs? This is a silly question but you know what: lest you accuse Friedman of prejudice against Muslims, he does have a token Muslim friend ("a Muslim woman friend wrote me"), just like bigots are willing to say "my best friend is black." Let me guess: his Muslim woman friend's first name is Irshad, no? You want Muslims to take to the streets? Let me ask you to take to the streets and go play with some marbles, as we say in Lebanon.

* http://www.nytimes.com/2008/12/03/opinion/03friedman.html

-- As'ad AbuKhalil

[anne]

http://angryarab.blogspot.com/2008/12/there-will-be-regular-feature-on-obama.html

December 3, 2008

There will be a regular feature on Obama here titled I Told You So. "The team’s other striking feature is its centrism. Mr Summers is on the conservative wing of Democratic economists. As Mr Clinton’s treasury secretary he backed the law that in 1999 tore down barriers between commercial and investment banks and still backs it despite recent criticism. Christina Romer, an economic historian from Berkeley, has just published a paper with her husband David showing how raising taxes retards growth. Jason Furman, likely to be named as an aide to Mr Summers, outraged unions for his 2005 article, 'Wal-Mart: A Progressive Success Story.' One hedge-fund manager who, before the election, was terrified Mr Obama would usher in 'confiscatory' tax policies breathed a sigh of relief. 'No Robert Reichs,' he said, a reference to the leftish adviser who was Mr Clinton’s labour secretary. 'There’s no radicals in the whole cabinet that anyone can find.' "

* http://www.economist.com/world/unitedstates/PrinterFriendly.cfm?story_id=12685546

-- As'ad AbuKhalil

[No Robert Reichs....]

[reason]

wjd123
Where is that quote from?

I know of an extensive article on this idea from Keynes by the often very radical (but always challenging) George Monbiot in the Guardian, but it is not linked here.

http://www.guardian.co.uk/commentisfree/2008/nov/18/lord-keynes-international-monetary-fund

[reason]

I keep saying but I hear hardly any echos that our real problem is a broken financial system, not just in the US but internationally. If the US never developed decade long massive trade deficits, the crisis of solvency we are now experiencing would never have developed.

The nearest I see in a popular website is this:
http://www.interfluidity.com/posts/1225607671

[anne]

http://krugman.blogs.nytimes.com/2008/12/03/even-more-on-nominal-wages/

December 3, 2008

Even More on Nominal Wages
By Paul Krugman

A few more notes on the did-FDR-prolong-the-Depression front:

1. Gauti Eggertsson has an interesting paper * arguing that NIRA policies, by reducing the expected rate of deflation, were actually expansionary.

2. There have been a lot of responses to my demonstration ** that the usual argument about the contractionary effects of wage increases doesn’t apply in a liquidity trap. I think it’s important to remember where we started — with the flat claim that FDR made things worse because he kept nominal wages too high. That’s a pretty simple argument, which happens to be wrong.

Might there have been some more subtle, complex mechanism at work? Maybe, but this is starting to feel like a conclusion in search of an argument to support it.

That said, Greg Mankiw makes an interesting point: he argues that the NIRA, by increasing workers’ bargaining power in the long run, might have discouraged business investment. In principle, this could be right. But my question is, do we need this to explain weak investment in the 1930s? Look at industrial production:

[Chart] Would you invest?

It stayed far below its 1929 peak for almost the whole decade, so that there must have been huge excess capacity almost everywhere. Why would businesses have wanted to invest, even if the labor movement had stayed down and out?

* http://www.ny.frb.org/research/economists/eggertsson/WastheNewDealContractionary.pdf

** http://www.princeton.edu/~pkrugman/nominal_wage.pdf

[anne]

The same Depression question is suggested now in looking ahead, why invest? Domestic non-residential investment was relatively tepid to begin with through the Bush expansion till 2007 when non-residential investment neared the long term average, investment will decline through the recession, but what reason will there be for investment to increase significantly as the recession eases to growth?

[Bruce Wilder]

Of course, by increasing workers' bargaining power, you might cut off management's option to be lazy and wasteful and effectively required business investment to raise productivity, while, also, of course, adding to the income necessary to finance demand for the products of mass-production.

[OhNoNotAgain]

So, on the Martin Wolf piece, are we starting to see a growing concensus that our existing trade arrangements not only don't work, but are actually dangerous to the stability of the world's economies (especially ours) ?

To that I say "welcome to the club, you'll find the punch and cookies in the back of the room".

[Bruce Wilder]

Tyler Cowen, I notice, is taking up the argument that FDR's pro-labor-union policy affected primarily the wages of some workers. This is a different argument, of course, and with his usual deft touch manages to ignore or hide all of the relevant evidence.

There's never a shortage of economists to plead the case for reducing wages.

[Bruce Wilder]

Edward L. Glaeser likes Christina Romer's appointment to the CEA. Brad Delong likes it, too, and is mad at John Judis, because Judis (The New Republic) is not so sure Romer isn't a closet Republican.

[Story]

Anonymous Banker..."First, S.B.A. loans are held on the books of the banks. They may be securitized later, but in today’s market that is close to impossible to accomplish."

This is the whole story. We don't have a significant source of domestic loans, so any loans that can't be marketed overseas will remain at a very low level. Citizens won't lend to business (capital goods), preferring to hold their savings in the form of inflation hedges instead. This prevents the system from working.

[OhNoNotAgain]

Bruce,

This sentence struck me as very odd:

"But once we get into the Roosevelt era, we have government propping up some wages above market-clearing levels and thus higher than necessary unemployment."

Especially the "higher than necessary" part. Is he arguing that the unemployment situation would have been *better* absent government intervention ? If so, then who or what was supposed to break the cycle of deflation and start to get money into the hands of those that would help increase the aggregate demand ? My reading of the time, albeit limited to a few choice books, is that, prior to Roosevelt's actions, companies used the existing labor situation to squeeze those that still had a job even further, to the point of exhaustion and illness. They weren't hiring new people at all, just lowering the effective wages of those that were still employed by making them work harder, longer hours.

[Destiny]

Martin Wolfe..."But only in this way can the deficit countries realistically hope to avoid spending themselves into bankruptcy."

So Martin is saying that the US destiny is not in US hands, but in the hands of China et al.

[anne]

http://www.nytimes.com/2008/12/03/business/03insure.html?hp=&pagewanted=print

December 3, 2008

UnitedHealth to Insure the Right to Insurance
By REED ABELSON

The company will sell the right to buy an individual health policy in the future even if you become sick.

http://www.pnhp.org/news/2008/december/unitedhealth_puts_a_.php

December 3, 2008

UnitedHealth puts a price on your rights
By Don McCanne

One of the many reasons that there is a push for comprehensive reform is that, in most states, individuals who have medical problems are denied the opportunity to purchase insurance on their own. This is one of the more serious flaws in insurance markets since this defeats the primary purpose of insurance - providing individuals with health care needs affordable access to health care....

[anne]

http://www.nytimes.com/2008/12/03/business/03insure.html?hp=&pagewanted=print

December 3, 2008

UnitedHealth to Insure the Right to Insurance
By REED ABELSON

For these economically uncertain times, the UnitedHealth Group has a first-of-its-kind product: the right to buy an individual health policy at some point in the future even if you become sick.

Called UnitedHealth Continuity, the product is not actual medical insurance, but is aimed at people who may have insurance now but are worried they might lose it — and might not be able to obtain it on their own. They may expect to retire early, for example, before they qualify for Medicare. Or they are worried about the possibility of losing their job and their health coverage.

People who are already sick will generally not be eligible for the new product. For those who do pass a medical review, they will pay 20 percent each month of the current premium on the individual policy to reserve the right to be insured under the plan at some point in the future.

"What this product is designed to do, for a very modest premium, is to essentially protect your insurability for the future," said Richard A. Collins, the president of UnitedHealth's individual insurance products, who says he is the first policy holder. His monthly fee is $50.

Some health policy experts question whether UnitedHealth Continuity is a good way for consumers to spend their money. They acknowledge that people who are forced to buy insurance on their own face a daunting task. If they are not healthy, such people may find any available coverage too expensive. And most states let insurers refuse to sell new individual policies to anyone with a pre-existing medical condition.

But if changes to the health insurance system do occur under the Obama administration, they say, UnitedHealth's new product might become obsolete.

"As an individual, you're betting against health reform," said Peter V. Lee, the executive director of national health policy for the Pacific Business Group on Health, a California group of employers who provide health coverage for their workers....

[anne]

So, about $600 dollars a year will allow you to buy full priced health care insurance in the future should you ever be without insurance and need to buy some then. The only gain being that the insurer has to take you later, at an appropriate price, even if you happen to have become sick.

This is buying insurance to be able to buy insurance at whatever price the insurance company decides to charge, but what are you buying actually? This seems like the nuttiest insurance I have ever heard of. Insurance against uninsurance, but at any price the company cares to charge. And, you have to be healthy to begin with to buy the insurance against uninsurance.

What am I missing?

I really have to move to France, I really do.

[anne]

"So Martin is saying that the US destiny is not in US hands, but in the hands of China et al."

I have no idea who Martin is, obviously not a buddy of mine, but if Martin is saying that US destiny is in China's hands, then Martin is a fool, but I am sure that Martin is not saying anything so foolish or worse even not knowing who Martin is.

[anne]

http://www.economagic.com/em-cgi/data.exe/fedstl/indpro+1

December 3, 2008

Industrial Production Index, 1929-1939

Year, Month, Index

1929 03 (8.3872) Hoover
1929 08 (8.7780) High

1932 07 (4.1185) Low

1933 03 (4.2387) Roosevelt

1936 11 (8.7480)
1936 12 (9.0185) Recovery to 1929 high

1937 05 (9.3492) High

1938 08 (7.0946) Low

1939 07 (8.3271)
1939 08 (8.4473) Recovery to 1929 high

* 2002=100

[20]

"His monthly fee is $50."

I wonder if this premium goes up at approx. 20% annually like private health insurance premiums do?

[kthomas]

So long as America remains a Kleptocracy, none of JMK's teachings are relavent.

[anne]

"I wonder if this premium goes up at approx. 20% annually like private health insurance premiums do?" *

The premium for the right to buy health care insurance is set at 20% of the cost of the policy that a person wishes to buy should the policy be needed. So, the price of the right to buy insurance will change yearly as the price of the insurance changes.

* http://www.nytimes.com/2008/12/03/business/03insure.html

[anne]

Remembering helps, UnitedHealth is not only the company that invented insuring your right to buy insurance but the company that managed to pay a set of leading executives $2.4 billion in 2005. I sort of remember there being 12 leading executives, among them the actual leader who had been paid $1.6 and eventually returned $400 million of that leaving $1.2 billion to afford the right to buy insurance.

[Patricia Shannon]

Anne, where is your link to the information on the UnitedHealth executive pay. Don't be so lazy, irresponsible, selfish, and all those adjectives you hurl at others who do this.

[Julio]

anne,

"This is buying insurance to be able to buy insurance at whatever price the insurance company decides to charge, but what are you buying actually? This seems like the nuttiest insurance I have ever heard of. Insurance against uninsurance, but at any price the company cares to charge. And, you have to be healthy to begin with to buy the insurance against uninsurance.

What am I missing?"

You're missing the opportunity! Collateralized Health Obligations! One tranche of insurance contracts of young, healthy people, one of middle-aged, somewhat sick,...

Is this a great country, or what?

[Patricia Shannon]

http://www.mcclatchydc.com/256/story/56943.html

http://www.kentucky.com/181/story/613414.html

Wednesday, Dec. 03, 2008
By Tom Eblen - Herald-Leader columnist

Well, the economists finally made it official this week: We're in a recession. And, guess what? They said it began a year ago.

If you're like the three-fourths of Americans who consider themselves to be "middle class," this probably didn't come as a surprise. Many people feel as if they've been losing economic ground for years. That's because many of them have been.
...
But the pain being felt in this recession has brought new attention to a trend economists have been watching for years: The rich really are getting richer, the poor really are getting poorer and the middle class has been shrinking steadily since the late 1970s.
...
"I see, basically, that middle class dissolving," said Ron Crouch, a sociologist who has headed the Kentucky State Data Center at the University of Louisville since 1988. "The issue is, it probably takes two incomes to make it in today's society."

Middle class is hard to define, but a basic measure is income. A year ago, a study by the non-partisan Congressional Budget Office reported big disparities in the growth of after-tax household income between 1979 and 2005, as measured in 2005 dollars.

The study found that the poorest 20 percent of American households saw their annual income rise by an average of $900 over that quarter-century. The second-poorest 20 percent, by $4,800. The middle 20 percent, by $8,700.

Things were much different on the high end. The upper-middle 20 percent of households saw annual income increase by $16,000. And the richest fifth, by $76,500. Among the wealthiest 1 percent of households, average annual after-tax income rose by $745,100, from $326,400 to $1,071,500.
...
Most people define middle class more broadly than just income; it's more about a feeling of security, Brooks said. Do I feel secure in my job, my home, my health, my retirement and my assets' ability to weather a setback?

For example, if every member of a family doesn't have health insurance, "you're just one bad illness away from risk," Brooks said.

That could help explain why the Pew Research Center and the Gallup organization reported this year that 25 percent of Americans felt they hadn't moved forward economically in the past five years, and 31 percent felt they had fallen back. It was the worst result in a half-century of polling on that question. Attitudes are important, because confident consumers spend more, and consumer spending is two-thirds of all economic activity.

[Patricia Shannon]

If it takes additional wage earners to maintain the same "standard of living", then wages have gone down. And the real "standard of living", which includes such things as leisure time, has also decreased.

[kthomas]

Collateralized Health Obligations?

Julio, you little devil!

Funny thing is, they should get a better rating than all that garbage sold under real-estate.

[kthomas]

If (or when) there is no more middle-class, what then?

I doubt our country will remain intact if that happens.

[anne]

http://query.nytimes.com/gst/fullpage.html?res=950CE5DB133FF934A15757C0A9609C8B63

April 27, 2006

Insurer Reviews Stock Pay

UnitedHealth Group, one of the largest health-insurance providers, said yesterday that its board would vote May 1 on whether to end stock-based compensation for a small number of top executives who already have a well-established stake....

William W. McGuire, the company's chief executive, said last week that he would recommend ending stock-option grants after The Wall Street Journal reported that his own options amounted to $1.6 billion, one of the largest totals for any executive.

The Journal reported that 11 UnitedHealth executives received stock option grants at the lowest daily closing price of their respective quarters, giving them the maximum opportunity for profit. The Securities and Exchange Commission has also made inquiries into compensation at UnitedHealth.

[anne]

http://www.nytimes.com/2006/04/26/business/26calpers.html?ex=1303704000&en=3681ed86de02eab5&ei=5090&partner=rssuserland&emc=rss

April 26, 2006

Calpers Questions Pay at UnitedHealth
By BLOOMBERG NEWS

The California Public Employees Retirement System, the largest public pension fund, said yesterday that the UnitedHealth Group, the health insurance company, must explain the $2.4 billion in stock options granted to its top executives.

Calpers, as the pension fund is known, sent a letter to UnitedHealth, asking for a meeting before UnitedHealth's shareholder vote on May 2. Calpers may withhold its proxy votes for the chief executive, William W. McGuire, who will receive $1.6 billion in options, and the members of the compensation committee, a Calpers spokesman, Clark McKinley, said.

"We're leaning that way right now," Mr. McKinley said....

[Yes.]

[Bruce Wilder]

OhNo: This sentence struck me as very odd:

Tyler Cowen: "But once we get into the Roosevelt era, we have government propping up some wages above market-clearing levels and thus higher than necessary unemployment."

It's right-wing ideological cant and it's bad economics. Pretty typical for Tyler, in my experience.

The odd thing, to me, is that anyone takes Tyler seriously as an economist, when he has so obviously dedicated his every waking moment on this earth to being a hack.

There are legitimate, conservative points of view in economics. Some of the smartest economists alive are to the Right of Attila the Hun. But, mostly, what filters into the political discourse from the Right are lies and ignorance. Tyler functions a step or two above Larry Kudlow most of the time, but only a step or two, and he's got lots of company.

". . . once we get into the Roosevelt era, we have government propping up some wages above market-clearing levels and thus higher than necessary unemployment" isn't valid economic analysis, isn't historically true, and isn't nice. He's trying to reduce the sum total of economic knowledge, erase accurate historical memory, and prepare the ideological ground for upward income re-distribution, to make most people poorer for the benefit of a few rich people. The man is a horror show.

[wjd123]

reason,

The quote is from Martin Wolf's article "Global imbalance threatens the survival of liberal trade."

[wjd123]

"So Martin is saying that the US destiny is not in US hands, but in the hands of China et al."

anne,

You can see from the title of the article he is talking about the destiny of liberal trade. That should be a matter that is scarier for China than the United States.

[anne]

http://www.ft.com/cms/s/0/027b1efc-c0a4-11dd-b0a8-000077b07658.html

December 2, 2008

Global imbalances threaten the survival of liberal trade
By Martin Wolf

[What is obviously going to happen is that soon, very soon, sooner than soon, we will be in an era of illiberal trade and I shudder at what that could mean.]

[anne]

Sorry, I did not notice the the reference had not been posted.

I appreciate Martin Wolf, but if nothing else what such economic fiends always but always forget is that trade is important beyond the economics. Trade is a diplomatic instrument of prime order, and we are not about to seriously be threatening trade with any prime power. The French understood this early on in the Cold War. China will not be threatened, nor India, nor Brazil, let alone Japan. As for the French, there will be no trouble buying scarfs and shoes, liberally.

[anne]

Here is a better look at Paul Krugman's production figures:

http://www.economagic.com/em-cgi/data.exe/fedstl/indpro+1

December 3, 2008

Industrial Production Index, 1929-1939

Year, Month, Index *

1929 01 ( 8.3872)
1929 03 ( 8.3872) Hoover
1929 07 ( 8.8682)
1929 08 ( 8.7780) High

1930 01 ( 7.7860)
1930 07 ( 6.9142)

1931 01 ( 6.1326)
1931 07 ( 5.9823)

1932 01 ( 5.0504)
1932 07 ( 4.1185) Low

1933 01 ( 4.4792)
1933 03 ( 4.2387) Roosevelt
1933 07 ( 6.6737)

1934 01 ( 5.6215)
1934 07 ( 5.7418)
1934 09 ( 5.3510)

1935 01 ( 6.4933)
1935 07 ( 6.5534)
1935 08 ( 6.7939)

1936 01 ( 7.3050)
1936 07 ( 8.1167)
1936 11 ( 8.7480)
1936 12 ( 9.0185) Recovery past 1929 high

1937 01 ( 8.9884)
1937 05 ( 9.3492) High
1937 07 ( 9.2891)

1938 01 ( 6.6436)
1938 05 ( 6.3130) Low
1938 07 ( 6.7338)

1939 01 ( 7.8762)
1939 07 ( 8.3271)
1939 08 ( 8.4473)
1939 09 ( 8.9584) Recovery past 1929 high

1940 01 ( 9.5296)
1940 07 ( 9.8903)

1941 01 (11.1829)
1941 07 (12.6860) High

* 2002=100

[When would we have expected private investment?]

[anne]

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=121&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=1929&LastYear=1941&3Place=N&Update=Update&JavaBox=no#Mid
http://www.bea.gov/national/nipaweb/SelectTable.asp?Selected=N

December 3, 2008

Gross Private Domestic Investment Index, 1929-1941

1929 ( 5.259) High

1930 ( 3.508)
1931 ( 2.204)
1932 ( 0.665) Low
1933 ( 0.981)
1934 ( 1.771)

1935 ( 3.279)
1936 ( 4.203)
1837 ( 5.249) Recovery near 1929 high
1938 ( 3.469) Low
1939 ( 4.461)

1940 ( 6.215) Recovery past 1929 high
1941 ( 7.590) High

* 2000=100

[Patricia Shannon]

http://www.wiley.com/legacy/products/subject/business/forbes/ford.html

On January 5, 1914, Henry Ford announced a new minimum wage of five dollars per eight-hour day, in addition to a profit-sharing plan. It was the talk of towns across the country; Ford was hailed as the friend of the worker, as an outright socialist, or as a madman bent on bankrupting his company. Many businessmen -- including most of the remaining stockholders in the Ford Motor Company -- regarded his solution as reckless. But he shrugged off all the criticism: "Well, you know when you pay men well you can talk to them," he said. Recognizing the human element in mass production, Ford knew that retaining more employees would lower costs, and that a happier work force would inevitably lead to greater productivity. The numbers bore him out. Between 1914 and 1916, the company's profits doubled from $30 million to $60 million. "The payment of five dollars a day for an eight-hour day was one of the finest cost-cutting moves we ever made," he later said.

It is interesting to see how the web is being used to shape views of history for the benefit of the power elite.

It used to be easy to find a reference to the fact that Ford foresaw that paying his people higher wages would lead to them being able to buy their own cars, and end up bringing him profit. Just look up "henry ford". But now, all of the early entries for

"henry ford" 1914
or even
"henry ford" 1914 sell more cars,

refer only to positive effects on employee turnover.

I finally found the following, from an on-line site for buying school essays. Not an ethical endeavor, but at least keeping this information from being lost, and giving a quote which can be used in other searches.

http://ondix.com/pdf/docs/essays_thesis_1071112328.pdf

In 1914 Ford astonished the business world by more than doubling the minimum wage for his workers, raising it from about $2.50 to $5. He argued that if his employees earned more, the company would sell more cars to them and reduce employee turnover. He said in regards to this economical move "The high wage begins down in the shop. If it is not created there it cannot get into pay envelopes. There will never be a system in vented which will do away with the necessity for work."

[Patricia Shannon]

http://www.ibiblio.org/prism/feb98/asian.html

In April 1914, Henry Ford and James Couzens announced that they would pay their unskilled workers $5 a day and reduce the work day to 8 hours from 9, "because that is about the least a man with a family can live on these days," as Ford explained in an interview. Five dollars was about twice the prevailing pay scale in the auto industry at the time.

Ford added later that decent wages helped him sell more cars, in addition to gaining better, more committed workers and reducing labor attrition.

[anne]

Patricia:

"On January 5, 1914, Henry Ford announced a new minimum wage of five dollars per eight-hour day, in addition to a profit-sharing plan."

Ah, I knew about the Ford wage increase but never gave any thought to it. I should have.

[Julio]

anne,

Thanks (always) for the numbers.

I'm particularly struck by:

Industrial Production Index, 1929-1939

1929 08 (8.7780) High
...
1932 07 (4.1185) Low
...
1937 05 ( 9.3492) High
1937 07 ( 9.2891)

1938 01 ( 6.6436)

and

Gross Private Domestic Investment Index, 1929-1941

1929 ( 5.259) High
...
1932 ( 0.665) Low
...
1837 ( 5.249) Recovery near 1929 high
1938 ( 3.469) Low

The extraordinary rapidity of the drops is remarkable. And, while I was aware (as is everyone else) of the 1932 disaster, the suddenness and force of the 1937 recession is striking.

Thankfully, I think I hear helicopters coming...

[anne]

Julio:

"This is buying insurance to be able to buy insurance at whatever price the insurance company decides to charge, but what are you buying actually? This seems like the nuttiest insurance I have ever heard of. Insurance against uninsurance, but at any price the company cares to charge. And, you have to be healthy to begin with to buy the insurance against uninsurance.

What am I missing?"

You're missing the opportunity! Collateralized Health Obligations! One tranche of insurance contracts of young, healthy people, one of middle-aged, somewhat sick,...

Is this a great country, or what?

[Brilliant.]

[wjd123]

anne,

This ones for you.

China has nothing to gain and a lot to lose from destabilising the US economy.

Thomas Palley
guardian.co.uk, Monday September 3 2007 22.00 BST
Article history

The US Congress is currently contemplating critical legislation aimed at remedying the huge US-China trade deficit. China and businesses that benefit from Chinese imports oppose this legislation, and to discourage action China has hinted at retaliation - including possibly selling its US treasury bond holdings. That threat has prompted some to argue against legislative action on grounds that risks of a trade war are too large and costly. Such thinking is mistaken. The reality is China's threats are empty, whereas its currency manipulation is wreaking significant, real damage on the US economy.

The Ryan-Hunter bill (HR 1498), now before the Congress, proposes treating currency manipulation as a form of illegal subsidy that would be subject to countervailing duties. In this fashion, Ryan-Hunter aims to offset China's undervalued currency and circumvent China's refusal to meaningfully revalue its exchange rate.

There is widespread agreement that China's currency is under-valued and harming the US economy. This harm works through the trade deficit and imports that displace spending on domestically produced goods, thereby injuring manufacturers. Additionally, the undervalued currency displaces investment by encouraging business to invest in China rather than the US. The challenge for the US is how to respond in light of China's exchange-rate intransigence.

Through its persistent trade surpluses China has accumulated over $400bn of treasury securities and it is now the second-largest foreign holder (after Japan) of government bonds. The fear is that China may retaliate against the US by selling bonds, causing the price of treasuries to fall and interest rates to rise. That in turn could trigger financial disruption, which in conjunction with higher rates could topple the economy into recession.

Such reasoning is deeply flawed for several reasons. First, China has little incentive to engage in such tactics. If it starts selling bonds that will drive prices down, causing large capital losses on its holdings. More importantly, China has no interest in playing Russian roulette with the US economy as that threatens its own economy. The reason China refuses to revalue its exchange rate is because it wants to retain a competitive advantage enabling it to sell in US markets. Causing a US recession would destroy the very market in which it wants to sell. Worse than that, a US recession could trigger a global recession, thereby undermining markets in Europe and elsewhere that China also relies on.

Second, the Federal Reserve can always intervene to mitigate the effect of any Chinese selling. Thus, were China to irrationally start selling, the Fed could step in and buy those bonds in so-called "sterilising operations". China would then be left holding lower-yielding bank deposits supplied by the Fed, and the Fed would hold the bonds sold by China. This would prevent interest rates from spiking and US taxpayers would actually benefit by saving the interest that would have been paid to China.

Thereafter, China could decide to sell its bank deposits and buy foreign currency. If it were to buy renminbi and repatriate its dollar holdings, that would cause China's exchange rate to rise, which is exactly what US policymakers desire. Alternatively, China could buy yen and euros, which would cause the dollar to depreciate against these currencies. That too would benefit the US, especially if the yen were to appreciate, as this would make US producers more competitive versus European and Japanese companies.

Appreciation of the euro and the yen would then shift America's exchange rate dispute with China to Europe and Japan. This would expose China to risk of retaliatory action from these countries, which are much more administratively aggressive in protecting their markets than is the US As a result, China could find itself at loggerheads with all its major customers (the US, Japan, and the EU), suggesting it will not go this route.

Meanwhile, passage of Ryan-Hunter would enable US manufacturers to seek countervailing duties offsetting the subsidy implicit in China's currency manipulation. That would raise Chinese product prices in the US and reduce Chinese imports, yet the benefit of higher prices would go to the US government rather than Chinese manufacturers. That again makes no sense for China, suggesting that Chinese policymakers would prefer exchange rate revaluation to tariffs. That way China at least gets the benefit of higher prices.

In sum, the US and China are currently engaged in a policy struggle that resembles the game of "chicken". Policy analysis can help disentangle the likely outcome of such a game by examining the credibility of each country's postures. Such analysis shows China's threats are empty. China relies on export-led growth to provide demand for its products and attract foreign direct investment. That means it cannot afford to destabilise the US economy or the global economy. And if it irrationally tries to do so, the Federal Reserve has the means to neutralise its actions.

[Alex Tolley]

"On January 5, 1914, Henry Ford announced a new minimum wage of five dollars per eight-hour day, in addition to a profit-sharing plan."

But during the depression, Ford wouldn't tolerate union organizing and thuggishly beat up workers who tried to distribute leaflets about organized labor.

[reason]

OK I'll do an Anne and publish a significant part of the very interesting Monbiot article for those too lazy to follow the link:
Keynes proposed that any country racking up a large trade deficit (equating to more than half of its bancor overdraft allowance) would be charged interest on its account. It would also be obliged to reduce the value of its currency and to prevent the export of capital. But - and this was the key to his system - he insisted that the nations with a trade surplus would be subject to similar pressures. Any country with a bancor credit balance that was more than half the size of its overdraft facility would be charged interest, at a rate of 10%. It would also be obliged to increase the value of its currency and to permit the export of capital. If, by the end of the year, its credit balance exceeded the total value of its permitted overdraft, the surplus would be confiscated. The nations with a surplus would have a powerful incentive to get rid of it. In doing so, they would automatically clear other nations' deficits.

When Keynes began to explain his idea, in papers published in 1942 and 1943, it detonated in the minds of all who read it. The British economist Lionel Robbins reported that "it would be difficult to exaggerate the electrifying effect on thought throughout the whole relevant apparatus of government ... nothing so imaginative and so ambitious had ever been discussed". Economists all over the world saw that Keynes had cracked it. As the Allies prepared for the Bretton Woods conference, Britain adopted Keynes's solution as its official negotiating position.

But there was one country - at the time the world's biggest creditor - in which his proposal was less welcome. The head of the American delegation at Bretton Woods, Harry Dexter White, responded to Keynes's idea thus: "We have been perfectly adamant on that point. We have taken the position of absolutely no." Instead he proposed an International Stabilisation Fund, which would place the entire burden of maintaining the balance of trade on the deficit nations. It would impose no limits on the surplus that successful exporters could accumulate. He also suggested an International Bank for Reconstruction and Development, which would provide capital for economic reconstruction after the war. White, backed by the financial clout of the US treasury, prevailed. The International Stabilisation Fund became the International Monetary Fund. The International Bank for Reconstruction and Development remains the principal lending arm of the World Bank.

[Arthur James]

You'd think Robert Reich would check his facts. At the Paris Peace Conference, Keynes did not "hold his tongue as Woodrow Wilson, David Lloyd George and Georges Clemenceau imposed vindictive war reparations on Germany". He worked himselfinto the ground to prevent this!

Markwell's book on "Keynes and International Relations" has a chapter full of evidence of this.

[anne]

"You'd think Robert Reich would check his facts."

Robert Reich has a penchant for not checking facts that first startled me, then became merely comical in the repetition.

This essay is precise and helpful and I am grateful for it:

http://www.guardian.co.uk/commentisfree/2008/nov/18/lord-keynes-international-monetary-fund/print

November 18, 2008

Keynes is innocent: the toxic spawn of Bretton Woods was no plan of his: The economist's dream was blocked for an IMF serving the rich. Reforms proposed by G20 leaders are too little, too late.
By George Monbiot - Guardian

This essay is typically and foolishly punkish, but I am grateful for it anyway:

http://www.guardian.co.uk/commentisfree/2007/sep/03/chinasemptythreat/print

September 3, 2007

China's empty threat: China has nothing to gain and a lot to lose from destabilising the US economy.
By Thomas Palley

[Alex Tolley]

Re: Reich and automakers:

"What to do? Short of a gas tax that would push prices back up to $5-a-gallon -- something deemed politically impossible -- the only way to get lots more fuel-efficient cars is to put the costs of the gas-guzzlers on to the automakers themselves, as part of a cap-and-trade system requiring the major sources of carbon-dioxide emissions to pay for them."

Well I nearly fell out of chair today with a WSJ op-ed piece suggesting we raise the gas tax with an income tax offset. Maybe raising taxes is no longer an automatic impossibility is was assumed to be?

"The latest Song of Detroit":
http://online.wsj.com/article/SB122835159000377899.html

[Alex Tolley]

re: "Coal Mining Debris Rule Is Approved"

One of a number of rule changes that the administration is trying to rush through in its last days. These look like political paybacks to contributors.