Relevant and even prescient commentary on news, politics and the economy.

Fairness as a concern of economics

by Linda Beale

There is an interesting book that I am just beginning, by George A. Akerlof & Robert J. Shiller. It’s called “Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism”. The jacket says that the authors “challenge the economic wisdom that got us into this mess, and put forward a bold new vision that will transform economics and restore prosperity.” It is clearly a Keynesian approach–the jacket, again, says they make the case for “a more robust, behaviorally informed Kenyesianism”.

Sounds like a tall order, and I have not yet read or thought about enough of the book to know whether it is satisfied or not. But I do find the emphasis on fairness of considerable interest.

Fairness has long been a keystone of tax policy, and yet there are a number of tax scholars who consider efficiency the quintessential policy consideration and sometimes appear to relegate fairness to the corner for hobgoblins of small minds. So I wonder if this book, and its recognition of the overriding importance of fairness to economic analysis, is indicative of a fundamental change in the academic approach to economics and related fields that have tended to push fairness aside.

Here’s a quote from Albert Rees (Chicago PhD in labor economics) that starts off the second chapter on fairness.

The neoclassical theory of wage determination, which I taught for 30 years and have tried to explain in my textbook…has nothing to say about fairness. … Beginning in the mid-1970s, I began to find myself in a series of roles in which I have participated in setting or controlling wages or salaries. … In none of htese roles did I find the theory that I taught so long to be the slightest help. The factors involved in setting wages and salaries in the real world seemed to be very different from those specified in the neoclassical theory. The one factor that seemed to be of overwhelming importance in all these situations was fairness. (Akerlof & Shiller at 20, quoting Rees, The Economics of Trade Unions, Univ. of Chicago Press, 1973).

The authors go on to admit that Rees exaggerates, but then they provide a critical insight.

However many articles there have been on fairness, and however important economists may consider fairness, it has been continually pushed into a back channel in economic thinking. … But fairness may be just as important as the economic motivations that are given prime time. (Akerlof & Shiller at 20.)

So what economic theories of fairness do the authors suggest merit consideration? They highlight socilogy’s equity theory of exchanges, which consider far more than the monetary value of the counterparties’ positions, adding subjective evaluations about status, gratitude and similar factors. Another if the theory of social norms, that suggests that people are happiest when they live up to what they think they should be doing, including conducting themselves fairly with others (and being treated fairly by others).

And how should fairness be taken into account? Essentially, Alerkoff and Shiller argue that the old way of treating “real” economics as fundamental and fairness as an afterthought has to go. In stead, if fairness motivations are discounted, justification must be provided for doing so.

This approach, they say, explains much better than traditional economics the reality of unemployment and the fact that most firms pay their workers more than the market would require. It has to do with one’s sense of fairness–if workers sense they are being treated more than fairly (and their wage is the ulimate symbol of this treatment), they will fully buy into the goals of their employers.” If they are treated unfairly, they will tend to shirk. Id. at 105.

The difficulty of course, is in settling upon a definitive theory of fairness. In tax, we often talk about “ability to pay”, in a relative sense, as the critical definition, which is in turn the justification for a progressive rate schedule that taxes wealthy people at a rate considerably (or, after 40 years of rate lowering, somewhat) higher than it taxes middle income people. Libertarians, among others, have pushed back against the ability to pay concept of fairness, arguing for one version or another of a flat tax. It is one of the critical struggles, from my perspective, in the current class warfare whereby some groups are pushing for zero taxation on capital income (through a national sales tax or consumption-base rather than an income-based tax system). In other words, though there is a long-held consensus position about fairness in tax, there is currently considerable foment around the very concept of fairness. I’m glad to see fairness appropriately emphasized, but that is just the first step to developing a fairer tax system or a more complete economic theory.

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Silly relief for this wonk


I have been chasing information on the budget deficits and potential impacts, the US trade deficit, and the cap and trade arguments linked to HR 2454 Waxman-Markey bill of hundreds of pages. Mostly it was figuring out how assumptions in data and baselines (such as the CBO reports) made a difference in the shrillness of the discussions on many blogs, including here. Then I visited David’s blog and laughed out loud. Cleared my head for a new try.

David Zetland at Aguanomics helped lift my spirits a little today from a tired and unreflective male perspective I suppose. I was tired of being an uberwonk at that moment, with too many details and charts, and it fit the bill.

22 June 2009

Monday Morning Smile

Indian Chief Two Eagles was asked by a white government official, “You have observed the white man for 90 years. You’ve seen his wars and his technological advances. You’ve seen his progress, and the damage he’s done.”

The Chief nodded in agreement.

The official continued, “Considering all these events, in your opinion, where did the white man go wrong?”

The Chief stared at the government official for over a minute and then calmly replied. “When white man find land, Indians running it, no taxes, no debt, plenty buffalo, plenty beaver, clean water. Women did all the work, Medicine man free. Indian man spend all day hunting and fishing; all night having sex.”

Then the chief leaned back and smiled. “Only white man dumb enough to think he could improve system like that.”

hattip to JWT

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Comments on US Army Future Combat System (FCS)

by reader ilsm

The good and the bad (not ugly) analysis of the radically restructured US Army Future Combat System (FCS) if offered by GAO 09-793T:

The testimony covers the lessons from the “restructure” of the US Army’s Boeing (Lead System Integrator, LSI, Bush administration non-ovation) FCS.

The report lists “Good” things to do again, but offers no justification for the funds spent pursuing a super weapon technological solution to an arcane set of problems: “Holistic vision of the future force/ Focus on leveraging capabilities through an information (holistic) network”.

Another goal is “Integrating a common vehicle platform, standardizing support and linking all elements in a networked self reporting information infrastructure giving commanders insight into location and conditions of individuals, vehicles and maneuver units.” This has been a goal of commanders since Xerxes, which is to have a picture of operations and threats in the “battlespace” and is something hotly pursued for air and sea battles as well. What is so innovative about this?

“Government insight into subcontractor selection and management.” Here the GAO thinks it is good for the Army to do what it hired the LSI to do. I do not think this is any better than “trust but verify”, which is a contract form largely unused called cost plus contracting with the to terminate a loser before too much money is lost.

“Establishment of organizations to train with and evaluate technologies to be spun out to current forces”. This is an endorsement of the Louisiana maneuvers of 1940. Some technologists believe, wrongly, that you should build a system, then find a use for it. That is hoping and wishing some future adversary wants to fight the way you wish. That was okay in Western Europe in 1939 because all sides had agreed to fight WW I over, but the future may not have so many hard headed militarists who view war as a joust.

All the good is not so good, nor suggests much to be repeated.

Next is the bad, and a common observation seen in the 60’s through today:
“Not executable within reasonable bounds of technical, engineering, time, or financial resources, “. The LSI and the Army did not know what they could do for the money. This supports other GAO observations about having knowledge before spending the money. This is common in each GAO set of findings. The program team says they can name the song in 4 notes and end up needing the whole chorus.(metaphore, of course)

“Technology and management immature and unable to meet DOD’s own standards for technology and design,” As above “undue optimism” of the technology and the integration into a “workable” solution.

“Weights and software code grew, key network systems were delayed, and technologies took longer to mature,” Resulted from technological optimism.

“By 2009, it was still not known that the FCS concept would work. Oversight has been extremely challenging, given the program’s vast scope (huge number of bucks better spent elsewhere) and the innovative, but close, partner-like relationship between the Army and the LSI” (Too close, too “success” oriented; how much money had to be sent after bad before failure was too expensive to hide?)

Oversight has been extremely challenging is code(“Success oriented”)for ‘don’t tell the bad news until it cannot be avoided, and raising the alarm proved that both the LSI and the Army were not doing the job!

These sets of statements of “good and bad” apply to most DoD acquisitions. Nothing changes, but new program people arrive who forget the past and move ahead to unknown demands on an ever optimistic industry, (which can do anything as long as time and money are not limited).

The point missed is that the only justification for this excursion into trying to run an impossible development is that FCS is needed for “modernization”. Good thing, the US would have been in trouble if the FCS were really needed to provide the common defense.

For the money I might as well whittle beaks……………..

But my dividend structure is less important than Boeing’s.
by reader ilsm (lightly edited for readability)

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Iran and American Conservatives

by Cactus

Iran and American Conservatives

In Iran, protesters – a mostly young, college educated intellectual urban crowd – are getting their heads bashed in by the regime. Conservatives in the US are championing them and criticizing the administration for doing nothing. I’m curious – over the past few decades, how have conservatives in the US reacted when a mostly young, college educated intellectual urban crowd has protested over one thing or another here in the US? Have conservatives generally championed these people? If not, what is the difference between the two situations?
by cactus

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by cactus

I was going through some old posts of mine looking for something I had written when I stumbled on a gem I had completely forgotten. A few years ago, I had a post that quoted a piece in the American Spectator. Sadly, it seems for some reason they’ve seen fit to take it off-line, but here’s a bit from my cut-and-paste job from a few years ago:

Kudlow: …The companies that lead that change will lead the NASDAQ to 10,000.
TAS: In this decade?
Kudlow: By 2010 it should reach 10,000. The Dow Jones–which is really an old-economy value index–should keep rising, because the old dogs are learning new tricks.
TAS: The NASDAQ at 10,000 will please my wife. But what about my mother? Where do you expect the Dow to be at the end of the decade?
Kudlow: I’ve been on the record for 35,000 for awhile.

Last I checked, the Nasdaq was at eighteen hundred and change, the Dow was about 8500. So figure we’ve got a 5X run-up due on the Nasdaq, and a 4X move on the Dow, all by the time we reach 2010. Unless, of course, Larry is wrong again. We all make the occasional mistake, but has anyone bothered to go back and check on this guy’s track record? All through 2008 he was talking about the goldilocks economy. I’m having a hard time coming up with something he was actually right on. Why do people listen to him?
by cactus

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Wise Words from Carbon Sense Coalition

by reader Sammy

Waxman-Markey: Intense Pain, No Environmental Gain

I know you guys won’t like the source…. but try to deal with the issue.

From this Editorial:

If the pending Waxman-Markey energy and climate bill (HR 2454) becomes law, utility bills will soar. Farm and business energy costs will skyrocket — and be passed on to consumers, or defrayed by layoffs. Everything Americans grow, make, buy and do will be far pricier. And bureaucrats will control our lives.

Compared to no cap-and-tax regime, Waxman-Markey would cost the United States a cumulative $9.6 trillion in real GDP losses by 2035, concludes a study by the Heritage Foundation’s Center for Data Analysis. The bill would also cause an additional 1.1 million job losses each year, raise electricity rates 90% after adjusting for inflation, provoke a 74% hike in inflation-adjusted gasoline prices, and add $1,500 to the average family’s annual energy bill, says Heritage.

The Cong ressional Budget Office says the poorest one-fifth of families could see annual energy costs rise $700 — while high-income families could see costs rise $2,200. Harvard economist Martin Feldstein estimates that the average person could pay an extra $1,500 per20year for energy. And those are just direct energy costs.

Written largely by professional environmentalists, the numbingly complex 942-page bill would require an 83% reduction in U.S. carbon dioxide emissions by 2050 — a level last seen in 1908……

There are disputes over the costs of cap and trade (of course), as modelling is extremely complex and fraught with assumptions.

Republican opponents have used the cost figure of $3,100 per household per year based on an MIT study which found a generic cap and trade program would raise an average of $366 billion per year in auction revenues for the federal government 2015-2030, divided by 117 million households. This assumes that the increase in permit costs will be passed to consumers, which seems reasonable to me, YMMV.

Recently,the EPA produced a study for Congress that pegged annual costs at $98-$140 per household. Heritage challenges this analysis here.

The major difference in the two studies, as well as the dissent of one of the authors of the MIT study, is that the smaller cost estimates assume that since the permit costs get paid to the Federal Government they are “returned” to each household, presumably in the form of public services. Ha ha ha ha.

But the bigger question is why?

Even worse, the draconian rules would have no detectable benefits, even assuming CO2 does cause climate change. Using global warming alarmists’ own computer models, research climatologist Chip Knappenberger calculated that the painful 83% reductions would result in global temperatures rising a mere 0.1 degrees F less by 2050 than doing nothing. That’s because Chinese and Indian emissions would quickly dwarf America’s job-killing reductions.

by reader Sammy

Update 3:00 PM: Rdan here- This was prematurely released by mistake, in that the most recent post is somewhat different. My apologies to Sammy and readers.

Additional sources National Black Chamber of Commerce, Carbon Tax versus cap and trade, state by state differences demonstrating national averages as mis-leading and the complexity of carbon foorprints per capita by state, and Scientific American on some objections to cap and trade models.

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The Internet and the Productivity Speedup

Robert Waldmann

The unexpected increase in US productivity growth in the 90’s and naughties is an economic puzzle. At the time it was widely argued that investments in information and communications technology had finally finally paid off, that computers and the internet allowed vastly improved corporation wide inventory control and the increased output given inputs reflected lower work in progress inventories. … hmmmm maybe.

After the jump I will get serious, but here I will describe a theory which just came to me. I was thinking “The internet caused productivity to Increase ?!?!? That doesn’t fit my experience. The internet caused my personal productivity to drop from low to minimal, and I know I’m not the only one.” In fact, my impression is that office workers, that is cubicle serfs, now spend a large fraction of their working time time in the office, surfing the internet.

Heeey, I thought, maybe that’s it. Maybe office workers contribution to actual production is negative. So my theory is that office workers, on average, mostly harass the people who actually make goods and provide services. Now that the internet has distracted us, the people who actually produce things have more time for actual production and waste less time responding to us.

You got to admit it answers a whole lot of quetions.

OK seriously what do I really think. I do think it has to do with office workers and, in particular, middle management. I don’t think middle management actually interfered with production, but middle managers and affiliated secretaries and janitors and such count in the denominator of labor productivity. In the 90s there was a wave of downsizing and delayering. Basically top management in many firms decided to thin the ranks of middle management on the grounds that middle managers weren’t doing aything useful. The outcome says that the top managers were ruthless and right.

To me the key figure is the almost completely forgotten and hated by the few who know who he is Phillip Caldwell. He’s the guy who replaced Henry Ford II as CEO of Ford about the time Ford president Lee Iacocca was fired went off to save Chrystler. Iaccoca was very famous for a while, the guy after Caldwell — Donald Peterson — was a corporate hero for a while. Caldwell was a subject that the business press preferred to avoid. When he arrived, he laid of 30,000 people from Ford headquarters staff. He totally disrupted the lives of hard working people who were doing the jobs they were assigned and who had no responsibility for any strategic mistakes (made by various actual human Fords and Mr Iacocca). What a total jerk.

However, no one noticed a decline in the contribution of Ford headquarters to Ford, and, by the way, Ford is not bankrupt.

An even earlier example was the ruthless Jack “the ripper” Welch at GE. Ruthless layoffs in his first years, record profits later.

Basically I think the story is simple — Parkinson’s law — bureaucracies naturally grow without limit. That includes the management of large corporations. Everyone knows that middle managers are mainly making work for other middle managers writing memos and calling meetings and stuff, but top management does not want to lay people off and especially not managers who are sort of like them instead of production workers who are sort of like equipment.

Before the productivity speed up there was the takeover wave. Corporate predators who converted huge amounts of equity to debt had to be ruthless to survive. Current top management decided they had to do what a predator would do after a takeover to avoid a takeover. They discovered that it was actually quite easy (middle managers don’t riot or even strike) and very very profitable. The Drexel Burnham Lambert turned out to have roots as solid as Burham woods, junk bonds turned out to be junk, gambling S&L’s went bankrupt and the takeover wave ended.

But CEOs had found a source of huge flows of profits — slash middle management, and decided to keep the money for themselves paying themselves monster compensation for their ruthlessness.

That’s my theory.

I think the standard theory is investment in computers and long slow painful learning what the hell to do with a computer by doing. The huge investment started in the 70s, but, given how helpless most people were with computers (and how user unfriendly computers were back then). Basically this is a theory that the productivity slowdown of the 70s and less so in the 80s was due to measurement error. Learning how to deal with computers is, in fact, investment in human capital, but the stock of human capital is not measured so measured GNP = consumption plus government consumption plus net exports plus investment in *physical* capital was much lower than GNP = measured GNP plus people learning to work with computers (plus other learning at a normal rate).

OK maybe. Betcha the person who came up with that theory had a *lot* of trouble learning to deal with computers *and* that he or she typed it up on a beloved PC.

Another theory is that output in the 90s and naughties was grossly missmeasured as houses and fiber optic cables and stuff were booked at their bubbly market prices, that is, that people weren’t producing more they were just imagining that the things they were producing were worth a lot compared to (among other indices) the wages of the workers.

I’m sure my brand new play on the internet and leave actual workers alone hypothesis is false, so back to work pressing a graduate student who is doing actual research while I blog to deliver the written product.

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Iran, stagflation, unemployment


Barkley Rosser at Econospeak raises several economic points to consider in the current political turmoil in Iran, stagflation (inflation over 17.1%) and significant unemployment (16.3%) among the whole population and perhaps double among the young (2006 data suggests the median age at 24/25 years).

…There are various numbers out there, but after digging around it would seem to me that the best estimate on the overall unemployment rate is that it was about 10.4% in December 2004 (, but that by February 2009 it had hit 16.3% (

…the inflation in Iran also appears to have risen as well from 13.5% in 2006 to 17.1% in 2008, prodiving the dread genie of stagflation ( , with some reports suggesting it has soared to over 20% in 2009, all of this with much higher oil prices than in 2005, which should have made things easy for Ahmadinejad economically. It should also be noted that most sources show youth unemployment being anywhere from 50-100% higher than the overall rate, thus quite possibly over 30% now, with that of young women possibly as high as 50%. No wonder that Ahmadinejad has been hurting badly on the economic issue, both with fervent youth now in the streets, as well as with such previous backer as the conservative bazaari merchants and even reportedly with elements of the military and Revolutionary Guards who respected Mousavi’s performance as prime minister during most of the Iran-Iraq war in the 1980s.

The real question now, in the face of clear electoral fraud by the regime, is why Khamene’i has switched sides and is backing Ahmadinejad this time over Mousavi, who appears not to have threatened the foundation of the regime before now. Khamene’i has called for there to be no demonstrations today in Iran, with the threat that any might be put down violently. This becomes even more problematic given that the one authority able to replace his is the council headed by former president Rafsanjani, whom he reputedly supported in 2005, but who now supports Mousavi by the best reports. Clearly this is a moment of deep decision in Iran…

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A Dan Froomkin Memory

Robert Waldmann

The Washington Post just fired Dan Froomkin. This has caused considerable outrage on the web. Interestingly, my personal reaction was that Froomkin doesn’t need the Post — he will get high traffic with a new affiliation or with an independent blog.

After the jump a recollection about how Froomkin has been getting in trouble for his journalism for over 30 years.

31 years ago today I was a freshman in the same dormitory as James Bradford DeLong. Dan Froomkin was then a senior in Sidwell Friends High School visiting colleges. He slept on a couch in the suit Brad shared with 3 other students (yes a suit, even freshmen have relatively decent accommodations at Harvard). Froomkin had a slightly tense reception. Brad had written an article about his first impressions of Harvard and, in particular, his suitmates published in the Sidwell Friends newspaper. Froomkin had illustrated it with drawings based on Brad’s descriptions of said totally innocent people whom I will not name on the web.

By some strange coincidence, Froomkin’s drawing of on suit mate — J.Y. — turned out, by pure coincidence, to be a very funny but harsh charicature of a completely different suitmate altogether* — J.E. and Mr E. was not pleased.

Thus I have seen Froomkin (then age 17 or 18) nonplussed by the reaction of one of the subjects of his journalistic efforts.

Somehow, I think this is a bit of a distinction as I don’t think many people have seen that.

*deliberately phrased in memory of pointless redundant words once written by George Orwell — another rare event.

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