Author: JW Mason

HAMP

I have nothing to add to what Atrios, Felix Salmon, my friend Mike Konczal, and others have to say. I just need to register my disgust with the Obama administration.

Steve Randy Waldman (via):

On HAMP, officials were surprisingly candid. The program has gotten a lot of bad press in terms of its Kafka-esque qualification process and its limited success in generating mortgage modifications under which families become able and willing to pay their debt. Officials pointed out that … even if most HAMP applicants ultimately default, the program prevented an outbreak of foreclosures exactly when the system could have handled it least. There were murmurs among the bloggers of “extend and pretend”, but I don’t think that’s quite right. This was extend-and-don’t-even-bother-to-pretend. The program was successful in the sense that it kept the patient alive until it had begun to heal. And the patient of this metaphor was not a struggling homeowner, but the financial system, a.k.a. the banks. … I believe these policymakers conflate, in full sincerity, incumbent financial institutions with “the system”, “the economy”, and “ordinary Americans”.

I want to write something longer, soon along the lines of that last sentence. It’s a good heuristic that when seemingly intelligent people keep doing things that fail to achieve their stated goals, their actual goals might be different from their stated ones.

In economic-policy debates, we tend to operate with the convention that maximizing economic growth — with perhaps some consideration of distribution — is the only objective, and we’re only disagreeing about means. But whose objective is that really? Ok, it’s society’s, insofar as society is embodied in the state; which is to say, in conditions of total war. (Another future post: All Keynesianism is military Keynesianism.) But outside of the case of a broadly-supported government fighting for national survival, the interest of “society” is seldom operational. Especially in a hyper-pluralistic polity like the US, what you have are broader and narrower particular interests. And when it comes to economic policy, the interest that matters is the interest of owners of financial assets.

You know the old joke of adding “in bed” to the end of fortune-cookie fortunes? I’ve increasingly felt the same kind of thing works for economic writing, especially financial journalism: Anytime you see a word implying a value judgment (good, bad, disaster, opportunity, frightening, promising), you just need to add “for bondholders” for it to make sense.

This is all more or less abstract and theoretical. But not with HAMP. There, the government of hope and change is willing to say right out that they don’t care about people losing their homes, as long as the banks don’t lose money. That it’s true is bad enough, that they’re willing to say it is worse.

As I said, at some point soon I want to write something more substantial about how things look when we take the bond’s eye view. But I can’t right now. Right now I’m so angry I can hardly breathe.

What’s the Difference Between Money and Debt?

(An idea I’ve been playing with lately, just wanted to get something on virtual paper.)

Currency, dollar bills, are liabilities of the Federal Reserve. Federal debt is a liability of the US Treasury. Leaving aside some deliberate obscurity around the precise legal status of the Fed, both are liabilities of the US government. Of course there are various formal differences, but economically, wouldn’t it be simplest to regard them the same?

In other words, while we are taught that there are no close substitutes for money but that government and private debt are substitutes for each other, wouldn’t it be better to say that money and government debt are substitutes for each other and both are complements for private debt? More concretely, given lenders’ need for liquidity, an increase in their holding of government debt may make them more willing to hold private debt, i.e. under some circumstances, an increase in government debt could put downward rather than upward pressure on interest rates further out the yield curve.

The canonical case is the recent financial crisis. As I’ve discussed before, there’s an argument (which gets at least some support from non-crazies like Perry Mehrling and Brad DeLong) that insufficient federal debt contributed to the crisis, by creating demand for equivalently liquid but higher-return substitutes, thus fueling the financial innovation of the 1990s and 2000s. Of course this dynamic would have increased the availability of credit for private borrowers whose liabilities were (a) seen as implicitly enjoying a federal guarantee and (b) easily securitizable. But for borrowers that didn’t meet those criteria, the lack of enough new federal debt may have made banks less willing to lend to them, in exactly the same way a lack of reserves would have in the old days. And even if the restriction of credit to non-securitizable borrowers was not that big in the boom, the lack of federal debt certainly exacerbated the crash.

So far this is just thinking aloud. But a bunch of smart people seem to be heading in this direction. Take for instance Roger Farmer’s call for more quantitative easing (via DeLong). Says Farmer, “Even if the Bank of England were to buy the entire UK national debt, this policy would not be inflationary.” This is just a dramatic way of making the point that as government debt and money have become closer substitutes, the economic consequences of shifts between them have become smaller. As Farmer says, money no longer occupies a discrete, unique role. Instead, there is a continuum of assets: “At the safe end of the spectrum there is cash. At the risky end there is equity and low grade bonds.” And in a rich country like the US or UK, government debt is very close to the money end. Where Farmer is less convincing is his idea that the interchangeability of money and public debt came about all at once, when central banks began paying interest on reserves. Seems to me it was a longer process of institutional evolution.

One implication of this, again, is that a smoothly functioning financial system requires more public debt, indefinitely. (Another reason to agree with Davidson, Galbraith and Skidelsky that austerity tomorrow is no more desirable than austerity today.) But there’s a second implication: If money as a discrete category is obsolete, then so is monetary policy as we know it. If Treasuries are as liquid as so-called high-powered money, then monetary policy — which comes down to injecting and removing liquidity — must work on the former and not just the latter; but of course the volume of federal debt is orders of magnitude greater than the volume of reserves. Which suggests that quantitative easing may be the only kind of easing there is, from here on out, that is, no more distinction between monetary and fiscal policy.

EDIT: What’s the affinity between cranks and money? Everyone knows that discussions of monetary theory bring all the cranks to the yard. But am I the only one who finds that writing about this stuff, makes me feel like a crank?

Karl Marx on the American Civil War

I’m sure I read somewhere — I’ve certainly repeated it enough — that Marx considered the US Civil War and the abolition slavery the only great world-historical event in his lifetime. This isn’t that, though it’s consistent with it. From The London Times on the Orleans Princes in America:

The people of England, of France, of Germany, of Europe, consider the cause of the United States as their own cause, as the cause of liberty, and that, despite all paid sophistry, they consider the soil of the United States as the free soil of the landless millions of Europe, as their land of promise, now to be defended sword in hand, from the sordid grasp of the slaveholder. … All the wars waged in Europe [since 1850] have been mock wars, groundless, wanton, and carried on on false pretenses. The Russian war, and the Italian war, not to, speak of the piratical expeditions against China, Cochin-China, and so forth… The first grand war of contemporaneous history is the American war. … In this contest the highest form of popular self-government till now realized is giving battle to the meanest and most shameless form of man’s enslaving recorded in the annals of history.

There’s also Marx’s letter, on behalf of the International Workingmen’s Association, congratulating Lincoln on his reelection:

When an oligarchy of 300,000 slaveholders dared to inscribe [the word] “slavery” on the banner of Armed Revolt, on the very spot … whence the first Declaration of the Rights of Man was issued, and the first impulse given to the European revolution of the eighteenth century…, and maintained slavery to be “a beneficent institution”, indeed, the old solution of the great problem of “the relation of capital to labor”, and cynically proclaimed property in man “the cornerstone of the new edifice” — then the working classes of Europe understood at once, even before the fanatic partisanship of the upper classes for the Confederate gentry had given its dismal warning, that the slaveholders’ rebellion was to sound the tocsin for a general holy crusade of property against labor, and that for the men of labor, their hopes for the future, even their past conquests were at stake in that tremendous conflict on the other side of the Atlantic…
The workingmen of Europe feel sure that, as the American War of Independence initiated a new era of ascendancy for the middle class, so the American Antislavery War will do for the working classes. They consider it an earnest of the epoch to come that it fell to the lot of Abraham Lincoln, the single-minded son of the working class, to lead his country through the matchless struggle for the rescue of an enchained race and the reconstruction of a social world.

Still not quite the definitive statement I’m looking for, but closer.

His assessment of Lincoln is interesting, too:

Lincoln is a sui generis figure in the annals of history.He has no initiative, no idealistic impetus, no historical trappings. He gives his most important actions always the most commonplace form. Other people claim to be “fighting for an idea”, when it is for them a matter of square feet of land. Lincoln, even when he is motivated by, an idea, talks about “square feet”. He sings the bravura aria of his part hesitatingly, reluctantly and unwillingly, as though apologising for being compelled by circumstances “to act the lion”. The most redoubtable decrees — which will always remain remarkable historical documents — flung by him at the enemy all look like, and are intended to look like, routine summonses sent by a lawyer... His latest proclamation, which is drafted in the same style, the manifesto abolishing slavery, is the most important document in American history since the establishment of the Union, tantamount to the tearing up of the old American Constitution.
Nothing is simpler than to show that Lincoln’s principal political actions contain much that is aesthetically repulsive, logically inadequate, farcical in form and politically, contradictory, as is done by, the English Pindars of slavery, The Times, The Saturday Review and tutti quanti. But Lincoln’s place in the history of the United States and of mankind will, nevertheless, be next to that of Washington. Nowadays, when the insignificant struts about melodramatically on this side of the Atlantic, is it of no significance at all that the significant is clothed in everyday dress in the new world?
Lincoln is not the product of a popular revolution. This plebeian, who worked his way tip from stone-breaker to Senator in Illinois, without intellectual brilliance, without a particularly outstanding character, without exceptional importance-an average person of good will, was placed at the top by the interplay of the forces of universal suffrage unaware of the great issues at stake. The new world has never achieved a greater triumph than by this demonstration that, given its political and social organisation, ordinary people of good will can accomplish feats which only heroes could accomplish in the old world!

Those Who Forget History, Are Probably Historians

There are hardly any economists or economic historians who have contributed more to our understanding of the role of international finance in the Great Depression than Barry Eichengreen and Peter Temin. [1] So it’s disappointing to see them so strenuously refusing to learn from that history.

They start by correctly observing that the fatal flaw of the gold standard was the “asymmetry between countries with balance-of-payments deficits and surpluses. There was a penalty for running out of reserves .. but no penalty for accumulating gold.” Thus the structural tendency toward deflation in the gold standard era, and the instability of the system once workers recognized that lower wages for “sound money” wasn’t such a great deal. If Temin and Eichengreen want to draw a parallel with the Euro system today, well, I’m not sure I agree, but it’s an avenue worth pursuing. But as they want to apply it, to the US and China, it’s unambiguously wrong, as economics and as history.

“The point,” say Temin and Eichengreen, “is not to let deficit countries off the hook.” Barry, Peter — read your books! Letting the deficit countries off the hook is exactly the point. If there’s one lesson in Lessons from the Great Depression, it’s that no practical response to the crisis was possible until the idea that a trade deficit represented a kind of moral failing was abandoned. The whole point, first, of leaving the gold standard, and later, of the Bretton Woods institutions, was to free deficit countries from the obligation to “live within their means” by curtailing domestic investment and consumption.

Keynes couldn’t have been clearer on this. The goal of postwar monetary reform, he wrote, was “A system which would maintain balance of payments equilibrium without trade discrimination but also without forcing unemployment .. on deficit countries,” [2] in other words, a system in which governments’ efforts to pursue full employment was not constrained by the balance of payments. We needn’t take Keynes as holy writ, but if we’re going to analyze current arrangements in light of his writings in the 1940s, as Temin and Eichengreen claim to, we have to be clear about what he was aiming for.

One would expect, then, that they would go on to show how “global imbalances” are constraining national efforts to pursue full employment. But they don’t even try. Instead, they offer ambiguous phrases whose vagueness is a sign, perhaps, of a bad conscience: Keynes “wanted measures to deal with chronic surplus countries.” What kind of surpluses, exactly? and deal with how?

The beginning of wisdom here is the to recognize the distinction between the balance of payments and the current account. Keynes was concerned with the former, not the latter. Keynes didn’t care if some countries ran trade surpluses or deficits, temporarily or persistently; what he cared about was that these imbalances did not interfere with other countries’ freedom “to pursue full employment and progressive social policies.” In other words, current account imbalances were not a problem as long as the financial flows to finance them were guaranteed.

“Creditor adjustment” is rightly stressed by Eichengreen and Temin as a central feature of Keynes’ vision of postwar monetary arrangements, but they seem to have forgotten what it meant. It didn’t mean no one could run a trade surplus, it just meant that the surplus countries would be obliged to lend to the deficit ones as much as it took to finance the trade imbalances. As Keynes’ follower Roy Harrod put it,”The most important requirement [is] to get the United States committed to creditor adjustment. …. Creditor adjustment could be secured most simply by an agreement that the creditor would always accept cheques from the deficit countries in full discharge of their debts. … So long as their credit position cannot cause pressure elsewhere, there is no harm in allowing a further accumulation.” All of Keynes’ proposals at Bretton Woods were oriented toward committing the countries with surpluses to lend, at concessionary rates if necessary, to the deficit ones.

China today accepts American checks in full discharge of our debts; they don’t demand payment in gold. The Chinese surplus isn’t putting upward pressure on US interest rates, or constraining public spending. All Keynes ever wanted was for all surplus countries to be like China.

“Sixty-plus years later, we seem to have forgotten Keynes’ point,” Eichengreen and Temin conclude. True that.

[1] The strangely forgotten Robert Triffin is one.

[2] The historical material in this post post, including all quotes, is drawn from chapters 6 and 9 of the third volume of Robert Skidelsky’s biography of Keynes.

Keyes Is Right

Alan Keyes says, “If citizenship is not a birthright then it must be a grant of the government. And if it is a grant of the government, it could curtail that grant in all the ways that fascists and totalitarians always want to.”

In other words, the rights vis-a-vis the state we call citizenship, are prior to the legal acts that formalize them.

Joshua Micah Marshall thinks that’s “dramatically crazier than any of the opinions on offer,” since Keyes attributes the priority of citizenship, in part, to God.

But as a historical matter, Keyes is certainly right. The founding documents of political liberalism — the Declaration of the Rights of Man and Citizen, the Declaration of Independence — explicitly state that the rights of the citizen are prior to their recognition by governments. If a government fails to recognize them, it’s that government’s legitimacy that is diminished, not the rights of the citizen.

In the specific 14th Amendment context, the point is that the right of the freedmen to citizenship wasn’t created by the 14th Amendment, but already existed by virtue of their living in this country and being subject to its laws. Did Congress have the power or the authority to deny them citizenship? Seems to me the Civil War answered that question clearly in the negative. The law binds most of the time, but ultimately it derives its authority from a set of norms that are prior to it.

This is certainly how the founders of liberal political orders, here and elsewhere, understood the relationship between the rights of the citizen and the law. That’s why they were ready to overthrow existing governments by force. Of course today it’s the Constitution and the law that regulate citizenship. But it’s important to remember that the fact that we — or almost anyone else — are citizens at all is not the result of legal or constitutional acts.

EDIT: It’s funny that reference to the founding documents of political liberalism is these days almost a monopoly of conservatives. Of course it’s not so strange, since conservatism is backward-looking by nature, while progressives naturally believe in progress. But the DNA of liberalism hasn’t changed that much, and Jefferson, Madison, and Hamilton, Lafayette and Saint-Just, and other Enlightenment political figures expressed it pretty robustly.

Unlike their forebears, modern liberals tend to insist on the absolute autonomy of the law in general, and the Constitution in particular. They’re unwilling, for obvious reasons, to accept a political order grounded on divine revelation, but they don’t have any alternative ground to put it on, so it ends up floating in the air. (Carl Schmitt is very good on this.) There’s what’s useful, and there’s what’s legal, under the law as it exists; but there’s no category of political legitimacy behind the law. Given the remarkable political stability of the United States since the Civil War, and just as important, as Herbert Croly emphasized, the continuously rising standard of living here, we’ve mostly gotten along fine without one. But one suspects that it wouldn’t take that much political strain for “government by lawyers” (Croly’s phrase) to experience its Wile E. Coyote moment, when it turns out that the authority of the law wasn’t underpinned by anything but a lack of good reasons to question it. Not unlike, perhaps, what happened in the financial crisis of 2008, when it turned out that not only did the traditional tools of monetary policy not work, they’d stopped working some time before.

The Golden Age Is In Us

Walking through Central Park a week or so ago, a perfect summer afternoon. Here are the trees, the birds, people playing frisbee, reading, walking dogs, picnicking, the rollerbladers performing by the bandshell, a woman working on an oil painting of Turtle Pond, a pickup soccer game. And look: nothing is for sale, no one is giving orders. But this isn’t passive, private leisure: All around is activity, often intense, focused; all around people are cooperating, being together, in a thousand different ways.

Like here, just past Sheep Meadow, where two middle-aged men are performing intricate classical and baroque pieces arranged as saxophone duets. They’re playing just for themselves, they don’t even have a tip basket. But they’re good, they’re tight; they must have been playing together for years. I’m walking somewhere but not in a hurry. I stop and join the two or three other people leaning against the fence and listening.

Is there any music recording, any music performance, that compares to the music that emerges, unexpectedly in the middle of something else? Is there ever a better performance than the one that’s not for any audience?

In The Ring of Time, E. B. White describes watching a young circus rider practicing some “elementary postures and tricks” in a back lot of the Ringling Brothers’ winter home in Florida:

The ten minute ride the girl took achieved — as far as I was concerned, who wasn’t looking for it, and unbeknownst to her, who wasn’t even striving for it — the thing that is sought by performers everywhere, on whatever stage, whether struggling in the tidal currents of Shakespeare or bucking the difficult motion of a horse. …

Long before the circus comes to town, its most notable performances have already been given. Under the bright lights of the finished show, a performer need only reflect the electric candle power that is directed upon him; but in the dark and dirty old training rings and in the makeshift cages, whatever light is generated, whatever excitement, whatever beauty, must come from original sources — from the internal fires of professional hunger and delight, from the exuberance and gravity of youth. It is the difference between planetary light and the combustion of stars.

This saxophone duo was the combustion of stars. The ten or fifteen minutes I spent listening to them I felt so purely happy, I almost cried.

We don’t need to build socialism, or not from scratch. It’s here all around us. We just have to scrape away the other crap.

A modest proposal: No more *s

Proposed for discussion: We should all stop reporting regression results with one or more asterixes for significance levels, and just give standard errors instead.

Why?

First, because use of the stars confounds statistical and economic significance, as then-Donald McCloskey so nicely put it in that classic article. An estimate may be more than two standard errors from zero, but still too small to be economically important. Conversely, it may be less than two standard errors from zero, but still convey useful information, since zero is not necessarily the relevant null. (And this is leaving aside the problem that standard errors become increasingly hard to interpret the more regressions you run, and these days people run a lot of regressions.)

Second, and even more seriously, because it leads to a focus on qualitative rather than quantitative results, as Deirdre McCloskey so damningly laid out in this recent pamphlet. I reckon tehre are far more interesting economic questions that take the form of how much rather than whether, but the habit of reporting significance levels rather than standard errors implicitly assumes that you are only interested in whether questions — specifically, whether or not the effect predicted by theory exists. Significance levels don’t give you any help in determining whether two estimates are consistent. They’re suited for qualitative, abstract-formal work but not for concrete, historical or policy-oriented work.

I don’t claim any of these observations are original. I’d even say they were commonplace — except why, then, do people insist on scattering those stupid little stars all over their tables, instead of just reporting the (much more informative) standard errors?

Frontiers in securitization

The prospect of industrialization in Africa is certainly thrilling. That’s perhaps the part of the world where the need for (and meaningfulness of) economic growth is clearest. It would be nice to see the term “developing” go from a bad joke to a neutral descriptor.

And, the questions Rajiv Sethi raises about history and convention (or expectations) as two distinct alternatives to an equilibrium approach to macroeconomics are very interesting.

But I can’t help it, the proposal to “securitize” future foreign aid flows makes my skin crawl. It’s not just doubts about whether the one-time windfall would be used to finance “big push” public investments, as opposed to tanks and palaces and Swiss bank accounts. It’s not just a suspicion that the foreign exchange earnings of most African countries are more than sufficient to finance the capital-goods imports needed for industrialization, if they were simply allowed to impose exchange controls (as almost all late industrializers have.) It’s not even the general observation that when the previously non-marketable assets of the poor are commodified, the usual long-term outcome is simply the transfer of those assets to the rich, without any additional cash in the hands of the poor. (There’s a reason we don’t allow people to sell kidneys.)

No, it’s just the idea that whatever hold Africa’s poor have on the world’s conscience is supposed to become one more natural resource, to be stripped off and sold to the West. Because what else does securitizing aid mean except, Give us the money upfront and then, if people here still end up starving, you don’t have to feel guilty?

Where do the rich get their money?

Well, from us, of course. All their dollars represent, is claims on our labor.

Still, it’s interesting to ask what forms those claims take. Especially since there is a widely-held belief that today, unlike in the bad old days, the incomes of even the super rich are, at least on paper, mainly compensation for their work — that they’re a return on “human capital” rather than the old-fashioned kind. Is there anything to that?

Here’s what the IRS Statistics of Income says:

Share of total income by source, filers reporting $1 million or more

Year Wages and salaries Interest, dividends, rent Capital gains Business income
1995 31.0% 17.2% 28.4% 23.1%
2000 33.2% 10.3% 42.5% 13.1%
2005 26.9% 15.7% 38.1% 22.3%
2008 30.7% 19.8% 30.4% 23.2%

Share of total income by source, filers reporting $10 million or more

Year Wages and salaries Interest, dividends, rent Capital gains Business income
2000 25.0% 8.6% 58.2% 7.4%
2005 17.5% 17.4% 50.8% 17.8%
2008 18.8% 22.1% 45.4% 18.7%

Share of total income by source, all filers

Year Wages and salaries Interest, dividends, rent Capital gains Business income
1995 76.4% 7.3% 4.0% 6.9%
2000 70.0% 6.5% 9.7% 6.6%
2005 69.5% 6.8% 8.9% 8.9%
2008 72.0% 8.1% 5.6% 7.5%

Source: IRS Statistics of income, author’s calculations
Notes: Income above $1 million not broken out before 2000. All nonwage income is net of losses. Business income includes business/professional income, S corporation and partnership income, and farm income.

So no, it’s no more true than it ever was that the rich earn their money, in even the most limited formal sense.

EDIT: In retrospect, I guess it would have been better to do the tables by year, with the rows by income class. Oh well.