The Slack Wire – Page 50

Looks like Goolsbee is the perfect pick to succeed Romer — his advice is already being ignored even before he’s been hired.

From his Investment Tax Incentives, Prices, and the Supply of Capital Goods:

Although there appears to be an abiding faith among policy makers that tax incentives can influence the investment decisions of firms and serve as a tool for stabilizing the economy, empirical evidence for the connection is weak. Econometric research has commonly found that tax policy and the cost of capital have little effect on real investment. Economic theory predicts that the marginal user cost of capital should be the primary determinant of investment demand but actual estimates of the price elasticity of nvestment … mostly lie between zero and -0.4… The evidence that investment is only modestly responsive to price has been one of the most robust findings of the empirical investment literature…

In addition to their large revenue costs, investment tax subsidies may give large, unintended rents to capital suppliers without increasing real investment until several years later because of the short-run asset price responses of capital goods. For policy makers interested in using tax policy to stimulate investment or, especially, to smooth business cycle fluctuations, the results are not promising.

[Down payment on a long analytic post coming along real soon now.]

The Wheels of Justice Do Grind Slow

I’ve had only had one job that paid minimum wage (or minimum plus 50 cents, as I recall.) That was as a bookstore clerk at Shakespeare & Company on the Upper West Side in the mid-90s.

The 85th St. bookstore was the flagship of the Shakespeare operation, which at that time included four Shakespeare and Co stores, two or three Murder Inks, and I think one or two other literary bookstores. It was generously, maybe from a strict business standpoint, overgenerously, staffed. We did spend a lot of time reshelving.

What’s memorable about the place is how everybody there was a book person. Some of us wanted to write fiction, some essays, some plays (that was kind of the store’s thing). Some wanted to work at publishers, some — for serious — were into the printing and bookbinding side of things. Most of of us wanted to write book reviews; some — well me, at least — left to edit the book review section of a marginal left-wing magazine. The book culture of the place was smoothly continuous from those of us behind the registers to the buyers to the mysterious owners upstairs. When publishers’ representatives came by we all met them, as a matter of course: they were selling to the store. I remember one of them spinning out this mystery novel she was going to write about a serial killer knocking off Granta‘s best young American novelists one by one; it seemed like a pretty good joke.

They used to have contests, beginning of the week, pick a book, whoever sells the most of it wins, well, I don’t remember what the prize was. Anyway I took it seriously; books I thought people ought to read. Oh hey, you’re interested in history, do you know Eric Hobsbawm? Oh, Jared Diamond, sure, but you know Plagues and Peoples covered a lot of that same ground? It was a point of pride.

And we hated shoplifters. There was one fellow who was a regular — he was obviously getting instructions on what specific resaleable books to steal. One time we’d had enough — it so depressing when two hours before closing there’s no one in the store except the professional shoplifters — and when he made his run for it we didn’t just accept the alarm-went-off;-oh-well as always. We took off after him. Why? it wasn’t our money. But we did: we caught him: or rather, like a lizard’s tail, we caught his bag, full of stolen books and hypodermics.

I first encountered the word “snarky” working at that bookstore. It was in a New York Magazine article about what was wrong with us, what was wrong with independent bookstores in general, why chains were the future. People wanted an antiseptic book purchasing environment, not all those book people telling them what to read. Whatever, we thought, all separately wondering how to incorporate “snark” into our new novel. But we should have seen the writing on the wall.

When the Barnes & Noble opened at 66th St., that was bad. When the next one opened at 82nd and Broadway, that was the end. This was not long after I started; surrendering, they had a going-out-of-business sale. And that was even worse. There was a brief false summer as the locals — our former customers! — picked over the stock that was suddenly attractive at 40% off; but as soon as the owners unwisely tried to reopen at full price those same customers tripped over each other rushing back to the lattes at Barnes & Nobles.

For the record, I suspect that if the Shakespeare & Co. guys could have competed with Barnes and Nobles at their scale, they would happily have done so. They weren’t doing it for the sake of small. Still, what matters is that you can get the books you want, and there it’s all progress, right? From your point of view as a consumer, probably, sure. I’m prepared to argue that you lose something when there are no more bookstore clerks like me, trying to sell you on William H. McNeill. On the scale of things it’s a small loss, but it’s a retreat from the world as it should be.

I don’t know if Shakespeare hired us because no one but book people would work for what they would pay, or because they had some vague idea that their clerks would rise to manage their little empire or simply because they were book people themselves. But hire book people they did. Within their world, you could imagine that it was a natural progression from clerking at a bookstore, to buying for a bookstore, to editing novels, to writing novels. As in a civilized world it will be.

Which is all to say: Fuck you, Barnes & Noble. I hope all of your stores close.

Kline

I know nothing about visual art. So all I can do, when I find myself in a museum, is to walk briskly from room to room — ah, Miro! ah, Johns! ah, Giacometti, the world’s most expensive sculpture! — until I find something that speaks to me. As today in LA’s Museum of Contemporary Art, walking briskly, until-

What spoke to me today, was half a dozen large canvasses by Franz Kline, who I don’t believe I’d heard of before. I walked through the whole gallery three or four times, each time more convinced that these were the only things there really worth looking at. Black and white abstract geometric paintings. The whole style inspired by the guy’s visit to de Kooning’s studio with some representational pencil drawings, which the master encouraged him to blow up to extreme magnification. An ah ha moment for Kline apparently. From then on these black and white paintings that could be a zeroed-in-on detail from a pencil drawing.

What you learn, when you are beginning to paint or draw, is that you have to stop seeing the thing in front of you as a familiar abstraction — a chair, a woman, an elephant — and learn instead to see what you see: the contour, the shadow, the volume, the tone. This is what Kline’s paintings do. Without representing, necessarily, any particular object, they use the language of representation. You see the process of looking without ever seeing the thing being looked at.

What I mean is there’s a visual vocabulary we use to depict three dimensional objects and spaces on a flat surface. And Kline — not uniquely, but more than most abstract expressionists — knows how to use that vocabulary even without any specific referent. So you have the sense of looking at a thing — an object, a building, a place — without the image ever resolving into anything in particular. (Like a constellation.) It challenges you, is there something in this farmhouse in the snow, in this knife or bridge or flower, that affects you visually directly, without some sentimental association? If there is, whatever there is, that’s what these paintings contain.

The Idiot

Were you doubting the fraudulence and corruption of the economics profession? Then watch this.

OK, watch it anyway:

Nonoverlapping Magisteria

This looks like an interesting book.

She’s arguing, as I understand it, that science cannot be ontologically complete, that it always coexists with other kinds of truth:

There is always ‘room left’ for alternative ontologies in cognitive-intellectual space, a realm that is neither cramped nor finite but, on the contrary, appears – both historically and for humans individually – exceedingly and perhaps infinitely elastic. … For many people … accepting, applying, and/or producing scientific knowledge and being religiously observant are no more in conflict than would be, for any of us, both playing the violin and practising law.

Interesting, maybe, as a bare assertion; more for the particular argument. Let’s say, on the one hand, that we accept a scientific view of religion. It’s a pattern of human behavior created by the interaction of our biological brains and our social environment; the potential for it was favored by its usefulness to our savannah ancestors and its actual existence by its usefulness for some social-political purpose today. Group cohesion then, the ploys of the Jesuits now, something like that.

The problem with this isn’t that it isn’t true; it is true, within some limits. The problem is that it explains too much. Every human belief system is the product of our Darwinianly-evolved brains and our social environment. You can fully explain religion, in principle, by a combination of genetic predisposition and practical advantage, but you can just as fully explain science, or anything else that people do. After all, we’re natural beings in the natural world; everything we do has a natural explanation. The most you can say in this framework is that science has displaced religion from many areas of life because of its greater utility; but by the same token you have to concede that religion has held on in other areas thanks to its greater utility. A purely naturalistic account of human beliefs has no place for them being true or false. People adopt them all for the same kind of reasons.

(Sraffa to Wittgenstein: “If the rules of language can be constructed only by observation, there can never be any nonsense said. This identifies the cause and the meaning of a word. The language of birds, as well as the language of metaphysicians can be interpreted consistently in this way. It is only a matter of finding the occasion on which they say a thing, just as one finds the occasion on which they sneeze.”)

On the other hand, almost anyone who cares about science prefers to believe it corresponds to some external truth about the world. One can’t object to this (Thomas Nagel, in this review, accuses Smith of objecting, but I suspect he’s got her wrong), but it’s not consistent with science being ontologically complete. A scientific account of scientific beliefs can offer various reasons for why people happen to hold them, but it has nothing to say about whether they are true. You may believe, if you like, that Betelgeuse would be 630 light years from the Earth whether anyone had measured the distance or not; but in a naturalistic account of why people do believe that, it all comes down to the measurements; independent of those the “objective” distance has no effect on anyone.

Put it another way: science offers heuristics for sorting beliefs into relatively confirmed and relatively falsified piles; but it doesn’t, and can’t, tell you why should prefer to hold the beliefs in the confirmed pile. Oh, say the new atheists, because they’re more useful. But right there they’ve conceded that if someone finds some social or psychological advantage in being religious, that’s as justified as anyone’s belief in science. To get along with your neighbors, to be free of angst about The Point of It All: aren’t those useful too?

Galileo is a hero of science and of civilization for eppur si muove. But what’s he saying? With respect to the heavens, he’s asserting that the demands of reality take precedence over what we think is right. But with respect to the earth, it’s just the opposite: He’s insisting on the priority of abstract right over concrete reality. After all, if he applied the same unromantic empiricism to his life as he did to his astronomy, he’d take one look at the instruments and conclude that practical experimentation revealed that the Earth goes around the Sun. (As did Brecht’s Galileo.) A belief that’s liable to get you tortured to death is pretty clearly less practically useful than a belief that leaves you torture-free. Galileo’s insistence that one should believe in science, come what may, is entirely unscientific, and — Brecht struggled with this — so much the better for Galileo.

The thing about the contradiction between the scientific method and belief in science is that it can be resolved either way. Nagel thinks that Smith is trying to apply the naturalistic, constructivist view of human beliefs “all the way down”. Me, I prefer to think she’s showing that’s exactly what you cannot do.

Blogs

In a fit of internet narcissism, I recently installed Google Analytics. Turns out this blog gets about 25 visitors a day, which is at least 20 more than I would have guessed. At least half come from Crooked Timber, presumably clicking on my “Lemuel Pitkin” link. So evidently, if I want more people to read this stuff (do I?), I need to find more blogs to comment on. But which?

I used to be a regular at Lawyers Guns and Money, but I can’t deal with Charli Carpenter. Apostropher is dead. The Poorman might as well be dead. Three Quarks Daily is ok but no one comments there. (Why?) Unfogged is too big a commitment. So is LBO-Talk (rocking it old-school mailing-list style), altho I’m tempted. Commenting on obscure blogs that no one reads is a mitzvah but, well, no one reads them. How about the heterodox econ blogs? Real World Economics Review? oh, but there are so many cranks. Angry Bear? Bruce Webb is good, but the rest of them… DeLong? I could comment on DeLong, but I’d get very angry. EconoSpeak? I like EconoSpeak, I was reading it back when it was MaxSpeak. (I got the original email announcing the creation of MaxSpeak, yo.) But it doesn’t feel like a community there.

It’s a mystery why there are so few left-of-liberal blogs. (It’s because the leftists are all too busy doing serious organizing work. Ha.)

Got to start a new group blog, clearly. Any of you 25 interested?

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.