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Austerity Arithmetic

Paul Krugman uses elementary Keynesian Macroeconomics to argue that the austerity demanded by the Troika would reduce the Greek debt to GDP ratio, if at all, only by causing deflation and increased Greek net exports. This means that it would take a very long time (or forever) to reduce the Greek debt to GDP ratio that way.

I add that this is also an argument for achieving primary surpluses through tax increases (as proposed by the Greeks) rather than spending cuts (as demanded by the rest of the Eurogroup).

The reason is that the effect of a tax increase on aggregate demand is multiplied by the marginal propensity to consume which is definitely less than one. Typical guesses are that it is about 1/3.

My comment

Alternative austerity arithmetic. But what if the 1% surplus were achieved by raising taxes not by cutting spending ? I will be extra super back of the envelope crude and assume that the accelerator effect is equal to the marginal propensity to import so the marginal propensity to consume can be calculated as 1/3 from the 1.5 multiplier . So a 1% of GDP increase in taxes would reduce GDP by (1/3)/(1-1/3) = 0.5% and that would reduce tax revenues by the back of Wren-Lewis’s envelope by 1/6 % so to get to 1% primary surplus taxes would have to be increased by 1.2 % causing GDP to promptly decline 0.6% and the debt to GDP ratio to promptly increase by about 1% so one year to get back to the no austerity debt to GDP ratio.

Your Phillips curve says 1.2*0.23 % less inflation so debt to GDP would fall
(1-(1.7*1.2*0.23)) % per year so it would take about 2 years to get back to where Greece would have been, 2< infinity.

But wait, there’s less. What if the increased taxes were taxes on high incomes (say profits over 100,000 euros per year). That would have a much smaller effect on demand.

Or how about increasing spending 0.5% of GDP and increasing taxes 1.5%. That gives a primary surplus 1% higher and no effect on aggregate demand.

The point is that Keynesians do not have to insist on deficits. The alleged need to choose either fiscal stimulus or low debt is nonsense or in any case has almost nothing to do with Paleo Keynesian macro and less to do with new Keynesian macro.

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OXI ~ 60%: What now? Greece Open Thread

Greece Interior Ministry Results
all regions voting ‘OXI’ = ‘No’

Huffington Post: Live Updates: Greece Votes In Referendum On Bailout Proposal

More links as afternoon progresses.

This article by Steve Randy Waldman at Interfluidity has been getting a lot of play around the Intertoobz since yesterday (I also linked to it in Comments on the previous Grexit post). It’s title is simple but it has a lot of depth and insight, I thoroughly recommend it. Greece

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Mellon-ization, Austerianism, and Grexit

“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate…

It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.”
-Andrew W. Mellon

This quote of the advice that Secretary of Treasury Andrew Mellon allegedly gave to President Herbert Hoover is famous, though mostly in the form that omits the second part. But it is exactly there that the ethos of Austerianism shines through. Which I would summarize as “high living is not for the undeserving” where “undeserving” is defined basically as anyone not in Andrew Mellon’s economic class. A class in which Mellon was an elite among the elites, take this from his Wiki entry Andrew Mellon.

Areas where Mellon’s backing created giant enterprises included aluminum, industrial abrasives (“carborundum”), and coke. Mellon financed Charles Martin Hall, whose refinery grew into the Aluminum Company of America (Alcoa). He became the partner of Edward Goodrich Acheson in manufacturing silicon carbide, a revolutionary abrasive, in the Carborundum Company. He created an entire industry through his help to Heinrich Koppers, inventor of coke ovens which transformed industrial waste into usable products such as coal-gas, coal-tar, and sulfur. He also became an early investor in the New York Shipbuilding Corporation.[2]

Mellon was one of the wealthiest people in the United States, the third-highest income-tax payer in the mid-1920s, behind John D. Rockefeller and Henry Ford.[1] While he served as Secretary of the U.S. Treasury Department his wealth peaked at around $300–$400 million in 1929–1930.

Mellon was a member of the South Fork Fishing and Hunting Club (whose earthen dam failed in May, 1889, causing the Johnstown Flood), and he belonged to the Duquesne Club in Pittsburgh. Along with his closest friends Henry Clay Frick and Philander Knox (also South Fork Fishing and Hunting Club members), Mellon served as a director of the Pittsburgh National Bank of Commerce.[3]

Which gets to my point. Clearly Mellon’s (apocryphal) advice was not to suggest that HE be liquidated, that HIS way of life would have the ‘rottenness’ purged, that HE would have to work a harder more moral life. No instead the liquidation was destined for those who never should have been in the market in the first place, the “less competent people”, thus allowing all the real assets underlying the investment bubbles to be picked up cheaply by “the enterprising people”. For example the members of the South Fork Fishing and Hunting Club and the Duquesne (town) Club.

My assertion is that this same underlying ethos of the “undeserving” (mostly but not just the poor) against the hard-working “deserving” (including but not exclusive to industrial and financial magnates) operated long before Mellon and long after him and fuels Austerianism today. Creditors are hardworking and deserving of their returns, debtors are not. And this includes not just individuals but whole countries. Like Greece. So in a pinch the right answer is to “liquidate farmers, liquidate stocks” while leaving those with deep capital to pick up the pieces.

A final note before turning this over. Under this ethos the phrase ‘shared sacrifice’ has a specialized meaning. Because the proposed sacrifices are very often in the form of pension ‘reform’ (i.e. cuts) and an increase in tax on consumption, which is to say a direct attack on the ‘high living’ of the ‘undeserving’. What you don’t see in general, and certainly not in the case of Greece, is any acceptance by creditors that ‘sacrifice’ require any significant tax on capital or haircut on financial investment. Business investment maybe, that is the ‘liquidate stocks … liquidate real estate’ piece of Mellon’s prescription, and driving small business to ruin is just an unavoidable part of ‘sacrifice’. But at no point was Mellon, or today the IMF or the ECB suggesting that any real burden should fall on hard working deserving bankers.

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Obama Overtime Rule = Truth In Advertising

The Obama Administration is proposing to raise the income threshold under which employers are required to pay overtime from $23600 to $50400 and predictably the economic right has started to squeal. And in so doing have tried to advance two cases: one this change will cost jobs, and two nobody will actually get a raise. The first case is fallacious, the second is at best deceptive. And to show that you don’t have to use fancy economic theory (a good thing because I don’t have the chops), instead you just have to just simple logic. But rather than try to lay out every possible branch on that logic tree I propose to let Angry Bear readers give either the affirmative or negative argument their best shot even as I through in some logic snippets of my own.

(For those unaware of the basic issue, under current law employers have to pay overtime to most hourly workers after 40 hours on the job. And also to salaried workers who don’t meet one or more of many exceptions. But the biggest and broadest exception is based on total salary, if you make more than $23,600 and are not protected via some specific contract (for example if, cough, cough, you are in a union) your hours are not limited to 40 hours per week, instead you may be routinely expected to work 50 even 60 hours a week for the same base pay. The Obama Administration proposes to raise that to $50400.)

Let the Games Begin!

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April Fools! Belated Social Security Joke.

Compilation of the Social Security Laws: Title 2
FEDERAL OLD-AGE AND SURVIVORS INSURANCE TRUST FUND AND FEDERAL DISABILITY INSURANCE TRUST FUND[3]
Sec. 201. [42 U.S.C. 401]

(c) With respect to the Federal Old-Age and Survivors Insurance Trust Fund and the Federal Disability Insurance Trust Fund (hereinafter in this title called the “Trust Funds”) there is hereby created a body to be known as the Board of Trustees of the Trust Funds (hereinafter in this title called the “Board of Trustees”) which Board of Trustees shall be composed of the Commissioner of Social Security, the Secretary of the Treasury, the Secretary of Labor, and the Secretary of Health and Human Services, all ex officio, and of two members of the public (both of whom may not be from the same political party), who shall be nominated by the President for a term of four years and subject to confirmation by the Senate. A member of the Board of Trustees serving as a member of the public and nominated and confirmed to fill a vacancy occurring during a term shall be nominated and confirmed only for the remainder of such term. An individual nominated and confirmed as a member of the public may serve in such position after the expiration of such member’s term until the earlier of the time at which the member’s successor takes office or the time at which a report of the Board is first issued under paragraph (2) after the expiration of the member’s term. The Secretary of the Treasury shall be the Managing Trustee of the Board of Trustees (hereinafter in this title called the “Managing Trustee”). The Deputy Commissioner of Social Security shall serve as Secretary of the Board of Trustees. The Board of Trustees shall meet not less frequently than once each calendar year. It shall be the duty of the Board of Trustees to—

(1) Hold the Trust Funds;

(2)[11] Report to the Congress not later than the first day of April of each year on the operation and status of the Trust Funds during the preceding fiscal year and on their expected operation and status during the next ensuing five fiscal years;

(3) Report immediately to the Congress whenever the Board of Trustees is of the opinion that the amount of either of the Trust Funds is unduly small;

(4) Recommend improvements in administrative procedures and policies designed to effectuate the proper coordination of the old-age and survivors insurance and Federal-State unemployment compensation program; and

(5) Review the general policies followed in managing the Trust Funds, and recommend changes in such policies, including necessary changes in the provisions of the law which govern the way in which the Trust Funds are to be managed.

The Social Security Annual Reports used to show up like clock work. In fact I used to have links set up on my blog that would activate the second the Reports was released to the web. Until one year late in the Bush Administration when it didn’t. A pattern then followed by the Obama SocSec Trustees every year since – no Report – no explanation – no corrected release date. Nope it just happens when it happens. Sure Social Security represents 5% of GDP and Medicare even more, but why should the American People or say Congress know WTF is going on.

The 2014 Report got released on July 28. Maybe we’ll beat that this year. Oh well since we CAN’T talk about a Report that doesn’t exist I guess this will have to be an Open Thread.

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Which Countries Work Hardest? You Might (Not) Be Surprised

Imagine you had to choose, and could choose: you can spend your whole life and raise your family in either of two equally prosperous countries. In one country people work lots of hours to attain that prosperity. In the other country people work far less. You don’t know anything else about these countries.

Which would you choose? The answer seems kind of obvious, right? Equally prosperous, and less work for me and my family? Sign me up!

But that straightforward question is almost never asked, explicitly, in discussions of prosperity, growth, and national well-being. The most obvious measure of that difference — hours worked per capita — is buried, invisible, and unavailable in the various national data sets scattered around the web. (The typical national measure you see out there is hours worked per worker.)

For the curious, here’s how more-prosperous countries (OECD and a handful of others) sort on the “hard-working” scale:

Screen shot 2015-06-28 at 5.35.57 PM

This average includes the whole population — workers, children, students, retirees, etc. — so it’s an index of how much the average person has to work over the course of their life. (More hours during working years, less or none during non-working years; it’s an average.) 

There’s one main generalized takeaway from this that I see: The less-work end of the spectrum is dominated by western European countries. People there work far less hours in the course of their lives. People in “Anglo”-model countries work far more.

Going back to choosing a country: you also want to know how prosperous it is in pure money terms, using something like GDP per capita. Here’s that (I’ve excluded tiny, crazy-high-GDP Luxembourg here — think: banking — to show other countries more clearly):

Screen shot 2015-06-30 at 12.08.53 PM

If you’re a rational shopper, you’ll choose Norway (yeah, they’ve got the advantage of all that oil…), Ireland, the Netherlands, or another country in the upper left. If an extra $5,000 or $10,000 a year is worth sacrificing four or five extra weeks of work, choose the U.S. (Think: “buying” an extra month of time with your family, doing things you like and love, every year. You decide. But do I need to remind you that 1. Life is short, and 2. “Family values” really do have value?)

One perhaps-surprising takeaway from this graph: hard-working countries aren’t richer. QTC. Causation? It seems improbable that working less would cause higher prosperity. Higher prosperity could quite reasonably cause people to work less. (The good old substitution effect, income versus leisure.) But the most likely conclusion is that high productivity (GDP per hour worked) is the 800-pound gorilla when it comes to prosperity. Long hours worked have zero or negative apparent effect on prosperity.

(Interesting parallel: hours worked per household member in the U.S. only “explain” seven percent of the variance between household incomes. Whodathunkit?)

Rather than eyeballing that scatter plot, you might want a handy index of which country to choose. Here’s one approach to what I’ll call Work-Weighted Prosperity: GDP/Capita divided by Hours Worked/Capita. If people in one country have to work lots of hours to get that prosperity, it gets ranked lower.

Screen shot 2015-06-29 at 6.06.17 AM

The takeaway here? Move to Luxembourg and get into banking.

The curious among you are probably wondering about different countries’ working-age populations (doesn’t actually vary that much), and the percentage of working age that are working (varies somewhat more). Here’s the spreadsheet.

Cross-posted at Asymptosis.

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Will the US keep winning indefinitely? ISDS, that is

Now that Congress has given the President fast-track Trade Promotion Authority, the first agreement to be considered under these rules (no amendments allowed, up or down vote in 90 days) will be the Trans-Pacific Partnership (TPP). As you know from previous columns, one of the most worrying aspects of the TPP is its expansion of investor-state dispute settlement (ISDS), wherein private firms can bring their disputes with governments not to courts, but to international arbitration (usually through units of the World Bank or the United Nations), where legal precedent doesn’t matter and appeal is all but non-existent. Moreover, as the Consumers Union has long argued (recent example here), arbitration has a well-known pro-business bias. That’s why so many of your agreements with cable TV providers, financial services companies, and many more have fine print requiring mandatory arbitration, keeping you from getting your day in court if something goes wrong.

The response from the U.S. Trade Representative’s (USTR) office has been, “Not to worry! The United States has never lost an ISDS case.” The linked document goes on to claim that worldwide, only 1/4 of corporate plaintiffs have won cases against governments. But a new analysis by the International Institute for Sustainable Development (IISD),* using the same data source the USTR cites, comes to a very different conclusion based on its most recent update, the 2015 World Investment Report from the United Nations Conference on Trade and Development (UNCTAD). Moreover, we can see that countries with even more trustworthy court systems than that in the U.S. have lost ISDS cases. The Rule of Law Project, an initiative of the American Bar Association, has ranked 102 countries on the administration of justice and freedom from corruption, and puts the United States at #19 with a score of 0.73. Yet #14 Canada (0.78) has already lost ISDS cases, and both Canada and #10 Australia (0.80) are currently on the hook for major new cases (Eli Lilly and Philip Morris, respectively), that would overrule decisions by the countries’ respective Supreme Courts. So, even if governments have only lost 25% of ISDS cases, it’s unlikely U.S. luck will hold out indefinitely, if countries with better court systems are losing.

But it’s worse than that. UNCTAD’s database of known ISDS cases and their outcomes shows that in all cases decided through the end of 2014, the investor won 27% of the cases compared to 36% won by the state (see Figure III.10, p. 116). But another 26% of the cases are listed as “settled,” which often (but not always) means the respondent agrees to make some payment to the plaintiff to keep the case from going to arbitration. Public Citizen has a list of ISDS cases under prior U.S. trade agreements with examples of settlements that do and do not contain payments (see, for instance, NAFTA cases against Canada).

Moreover, as IISD attorney Howard Mann argues, if we separate out cases between jurisdictional determinations and determinations on the merits of the case, things look even worse for states. While only 71 of 255 cases (this excludes the “settled” cases) were concluded by a decision of the tribunal having no jurisdiction, Mann points out that all 255 cases effectively had decisions on jurisdiction, i.e., cases with final decisions had to have rulings that the arbitrators had jurisdiction. In that case, Mann says, “Investors, therefore, have won 72 per cent [184/255] of jurisdictional determinations.” And of the decisions on the merits of the cases, investors won 111, or 60%, of the remaining 184 cases. This calculation suggests that states are losing ISDS disputes at a much higher rate than normally portrayed. As if that’s not bad enough, the new World Investment Report finds that in 2014, of the 15 ISDS cases decided on their merits, states lost 10 (2/3) of them. In 2013, it was even worse for states, with investors winning 7 of the 8 cases decided that year (p. 126). If these higher proportions continue, obviously the proportion of investor victories will increase beyond the current 60% total.

Bottom line: The threat to regulation, democracy, and the rule of law posed by investor-state dispute settlement is very real. The U.S. Trade Rep’s  reassurances that the U.S. has never lost in ISDS don’t even make it likely that will continue into the future. We need to pressure Congress to vote down the TPP when negotiations conclude.

* Important disclosure: I have consulted for IISD several times since 2007 on investment incentive issues.

Cross-posted from Middle Class Political Economist.

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