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

Popularity, influence, and econoblogs…top 21 includes AB

Angry Bear made it to 21st on the list in popularity and influence this time around (I counted). I don’t really know how they determine this in detail, but next time Mrs. Rdan asks why I spend a lot of time blogging, I’ll use it.


A small number of blogs have a higher rank than before. Sometimes, such as in the case of The Becker-Posner Blog, the number and quality of citations account for an increased rank. However, most of the blogs that are ranked higher than before have received citations from more influential blogs. This is the case with Angry Bear, a blog that has the same level of Popularity but has more than doubled its Influence in the last months.

In our analysis, the data covers the period May 2011- November 2012.

(h/t rjs)

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US to be leading producer of oil?? What does that mean?

Lifted from a note on energy from Reader rjs comes a link filled narrative on oil and production issues for oil.  He deals with one aspect of drilling for “energy independence”.

From reader rjs:

Saudi America?

The release of this year’s edition of the World Energy Outlook from the IEA (International Energy Agency) received quite a bit of media attention over this several weeks, mostly for its forecast that the US will overtake Saudi Arabia to become the world’s largest oil producer by around 2020. That such would happen shouldn’t be much of surprise to anyone who’s followed world oil production for any length of time; the Saudis, Russia and the US have been the world’s leading producers for at least 40 years.

 Just compare historical production for the US, for Russia, and for Saudi Arabia).  Our problem has always been that we’ve consumed more than twice our production, while the Saudis, with their smaller population and domestic usage, have been the world’s leading exporter and the one country seen as having reserves ample enough to backstop the markets. Apparently the IEA feels that even with enhanced recovery methods, the Saudi’s cant squeeze much more out of their declining Ghawar oil field, which supplies 60% of their production, and for the next few decades US production will increase due to our unconventional recovery techniques, notably fracking.

But we should note is that even if this temporary switch in world production leaders were to come to pass (and there are plenty of skeptics), this near energy independence will not lower our costs of gasoline for several reasons. The most obvious reason self sufficiency in energy wont lower prices is that crude oil is fungible and prices are determined by worldwide demand & supply. Moreover, the IEA figures include natural gas liquids in our expected production, which by 2011 had come to account for 28% our total unconventional production, & you cant produce gasoline from natural gas liquids. The other reason that domestic oil will of necessity stay high priced is the amount of continued investment that is needed to produce oil from shale.

The adjacent graph, which comes from a report from the N.Dakota Dept of Resources (pdf), shows the production over time from a typical well in the Bakken shale, which is now the most productive field in the US. What you see here is that unlike conventional oil wells, where you might drill one well that produces decently for 40 years, the typical bakken well production falls by over 80% in just two years, because after the initial oil flow from the pulverized rock, the flow slows to a trickle.

So to continue to produce oil from the bakken, or any other shale formation, you have to drill more & more wells, smash more bedrock, truck in millions of gallons more of water & chemicals, all of which is an ongoing capital drain. And even though we are expanding our capacity to tap shale oil considerably, the seven fold increase in oil drilling rigs in the US since 2009 has only produced about a 20% increase in oil production

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Modeling the Wealth, Income, and "Saving" Effects of Redistribution: More is Better?

Update: More expansive discussion of this model with more graphics, here.

Update 2: There is a revised and corrected version of the model and spreadsheet here, with discussion.

It has long seemed to me that redistribution is, for some reason, necessary for the emergence, continuance, and growth of large, prosperous, modern, high-productivity monetary economies. No such economy has ever emerged absent large quantities of ongoing redistribution. There are no exceptions; every such economy on earth engages in it on a large scale. The Economist recently devoted a whole special section to the need for Asian countries — notably China — to develop such systems of social redistribution in order to make the move from “developing” to “advanced.”

That’s the big-picture empirics. What I’ve been missing, have been unable to find, and have been struggling to conceive, is a straightforward, intuitively convincing economic model (mathematical or at least arithmetic) to explain this fact theoretically.

Paul Krugman says that thinking in terms of models will make you a better person. I want to be a better person.

I think I may have finally created such a model. (I’m feeling better already.) It’s a very simple dynamic simulation model (set it up, plug in parameters, and watch it run over the years), and it’s purely monetary. It makes no attempt to model the real economy of production and trade in real goods. It makes no distinction between consumption and investment spending; there’s just spending. It doesn’t require a theory of value, or of capital, or of profits. It simply assumes that production and trade happen, and that they yield a surplus. You can imagine that surplus as consisting of new real assets, or being embodied in new financial assets that are representative of those real assets. It doesn’t really matter.

The model is based on one and only one behavioral assumption: declining marginal propensity to spend out of wealth. (Something I fiddled with previously, here.) That in turn is based on the declining marginal utility of consumption (the millionth dollar spent yields less utility than the first). The assumption, which seems safe both empirically and theoretically:

Rich people spend a smaller portion of their wealth each year than poorer people.

In this model each person’s spending is replaced each year by income (with a surplus), but the spending is determined by the person’s wealth. It assumes that people expect the income to replace the spent wealth, but they’re not certain that it will, always. So they (especially those with low income/wealth) are facing a tradeoff between present spending and long-term economic security. Different wealth/income levels have different propensities to substitute one for the other.

This is basically looking at spending and income from the opposite direction of most such models. Here, spending drives aggregate income (all spending is income, when received), rather than spending being determined by income (which is how we tend to think about individuals).

The rest is just arithmetic.

Here’s the basic setup, with a population of 11 people. The spreadsheet is here (Google Doc version here); you can change of the numbers and see the results.

I’m assuming 0% inflation for simplicity.

One person has $1 million.

Ten people have $100K each: $1 million total.

The rich person spends 30% of their wealth annually ($300K to start).

The ten poorer people spend 80% of their wealth annually ($80K each, $800K total, to start).

Through work/production and gains from trade, each person gets 5% more income annually than they spend. I’ve black-boxed that whole surplus-creation process; it just happens. I’ve set it up so that income (including the surplus) is distributed to the population proportionally based on how much they spend. It’s a somewhat arbitrary choice (I had to make some choice), but since people’s incomes and expenditures do tend to correlate fairly closely, it doesn’t seem like a nutty one.

The additional money for this annual +5% would come from new bank lending and/or government deficit spending and/or Fed money printing and/or trade surpluses with other countries. Choose your monetary model/paradigm; in any case the surplus is monetized via trade and the financial system.

So no, Income ≠ Expenditure (or vice versa), unless you include purchases of new financial assets in “Expenditures.” Absent those purchases/receipts, Income is 5% greater than Expenditures. That’s what surplus from production/trade is all about, how it plays out in an economy that includes monetary savings.

Now add this: Some percentage of the rich person’s wealth is transferred to the poorer people every year (by the ebil gubmint man).

Does that wealth transfer make everyone wealthier, or poorer? Here’s the result with the numbers I set out above:

In this model, taking money from the rich and giving it to the poor make us more prosperous in aggregate, raises all boats, makes the pie bigger…you’ve heard all the metaphors.

Explanation below the fold.

The arithmetic, and the theory, is simple:

1. Redistribution results in more spending (because of declining marginal propensity to spend from wealth)

2. More spending spurs more production

3. More production (and trade) produces more surplus

4. Surplus (monetized) is the source of monetary savings

5. Bonus: More savings (wealth) results in more spending. (Note the exponential curves.)

6. Repeat loop.

The result seems to be an apparently counterintuitive, but on consideration very obvious, conclusion:

Saving doesn’t cause saving. Spending causes saving.

The preceding is halfway tongue in cheek. It points out how problematic the word “saving” is in a monetary context. Saving some of this year’s corn crop is straightforward enough — eat less of it. Money makes it into a far more complicated concept, cause you can’t eat money.

I would say instead:

Spending causes accumulation, because it spurs production and trade, resulting in a surplus. That surplus is what allows for accumulation.

So we want more spending, and less so-called “saving.” Some people call it money hoarding, but that’s confusing too. The best synonym for monetary saving is “not spending.”

I’m with Nick: we should stop using the word saving.

More monetary saving by individuals (the word works fine for individuals) — spending a smaller proportion of their wealth on real goods each year — results in less accumulation in aggregate.

Faithful readers will recognize that this purely monetary model sidesteps and obviates the need for the conceptual quagmire associated with S = I = Y – C — a construct which, in its effort to go in the opposite direction from mine and model a barter, real economy devoid of monetary savings, arguably makes it impossible or at least very difficult to think cogently about how monetary economies (i.e. all economies) work.

But how about sharesies? Is it fair? Here’s how it plays out:

20 Year Change in Income/Wealth
Redistribution Rich
Poorer People All
0% 35% 119% 96%
1 10 165 123
1.5 0 192 139
2 -10 221 158

At 1.5% redistribution in this model, the rich person’s income, spending, and wealth all stay the same over time (remember: no inflation here), while the poorer people’s income and wealth almost triple, and overall wealth and income more than doubles. Seem fair to you? Pareto devotees please comment.

I know exactly where everyone’s going with this: incentives and behavioral responses. And I have to admit that I did make one other behavioral assumption here: that there are no other behavioral responses.

Giving a bit less money to the rich person will give slightly less incentive to work. But at the same time it’s giving ten poorer people far more incentive to work. You do the math. (This all before we get into issues of substitution vs. income effects at different wealth and income levels, something I won’t even begin to address here.)

Whatever combination of behavioral effects one might posit, I would suggest that the burden of proof lies with the positor to demonstrate, empirically, that those effects are sufficient to overwhelm (or supplement?) the inexorable arithmetic of compounding that’s at play here.

Finally, note that this model doesn’t even touch on aggregate utility delivered under each regime. Since the spending of the poorer people is split among ten — each spending $80K/year to start — a larger proportion of that spending is on necessities like food, clothing, shelter, health care, and education. I think all economists will stipulate to the proposition that those purchases yield higher utility per dollar than a family’s purchase of a third car or a fourth TV. So the graph above greatly understates the higher aggregate utility provided by redistribution, and the table either understates the utility gains by the poorer people, or overstates the gains by the rich one. (It would be easy to add a somewhat arbitrary formula to represent that effect graphically, but I’ll leave it to your imagination.)

And: this utility effect would serve to multiply the incentive for poorer people discussed in the previous paragraph, giving the ten people even more incentive to work.

I’m rather taken with this spending + surplus = income dynamic approach to modeling. (But I would be, wouldn’t I?) I’d be delighted to see how others might analyze and display results using various parameters, and how they might adjust, improve, or dismantle the model. In particular: are there obvious, gaping flaws here?

Cross-posted at Asymptosis.

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The Media’s Role in Driving the "Fiscal Cliff" Imagery

by Linda Beale

The Media’s Role in Driving the “Fiscal Cliff” Imagery

The mainstream media has been fed a steady diet of releases from interested parties (like right-leaning propaganda tanks) about the need to adopt austerity measures, often cast as needing to save the country from out-of-control spending and unprecedented deficits and debt.

At the same time, the mainstream media has generally given up investigative journalism to engage in sports-like “he said-she said” journalism:  it treats most fiscal issues as a contest between left-leaning and right-leaning groups to be described by each side’s post position–i.e., as a merit-based race between equally valid positions.  Without the investigative wherewithal for in-depth research, there’s much less information about whether and how the facts may support one side and not the other.

We see it on climate change, where a scientific consensus is treated as just another opinion contrasted with the wishful opinions of anti-environmental corporatists.  We see it on evolution, where belief-based creationism is taught in schools alongside fact-supported scientific theory, with the two sides reported in the news as though they represent equally valid educational positions.  

It shouldn’t be surprising, therefore, that this approach surfaces in spades when it comes to the so-called “fiscal cliff”.

One is hard pressed to find articles that give credence to the position of progressives on Social Security (it is not bankrupt), Medicare (we can solve the long-term problem of financing of reasonable universal health care without cutting benefits by learning from the facts and experiences about controlling medical care costs through single-payer systems like those adopted in every other advanced nation), or even taxes.  The possibility of using the end-of-year changes as a fresh-start, “sweep the house clean” foundation for immediate action early in the new term is often ignored and, if mentioned, is generally given short shrift and inadequate explanation.

It’s easy, though, to find forecasts of return to recession outcomes if the sequester and end of the Bush tax cuts are allowed to take place as currently enacted.
Take, for example, the rhetoric of Mark Johnson in a report, A Fiscal Cliff primer (Nov. 18, 2012, updated Nov. 19).
If Congress cannot come up with an agreement on the Simpson-Bowles ratification, and then cannot come up [with] enough compromises to pass a plan of their own, and the President refuses to extend the current January 1st deadline, it’s over the cliff for Uncle Sam.
And, straight into the tax increases, unemployment jump, deep federal cuts and probable recession; A rough landing for the country and a scenario neither side wants.

The article adds to the crisis drumroll by quoting political scientist David Adler.

“And all the progress that Idaho families made in getting out of the recession will have gone by the wayside if in fact America’s politicians in Washington are not able to put our fiscal house in order.” Id.

In a similar vein, Jonathan Weisman in the New York Times reports today that “negotiators” have agreed on the parameters for a deal in which they will agree on fixed amounts of revenue to be raised (without tax rates increasing) and fixed amounts of cuts to social programs (and other federal programs like farm subsidies).  Jonathan Weisman, Seeking Ways to Raise Taxes but Leave Tax Rate as is: Negotiators Float Ideas to Appease Both Parties, New York Times (Nov. 23, 2012), at A12.

The article contains a good bit of information (or speculation, it isn’t completely clear) about what “negotiators” are considering in order to “pacify” the Republicans without permitting tax rate increases.  There’s no specific source attribution other than to “”aides involved in the negotiations” and a “Republican aide involved in the current talks.”  Id.  Predictably, it also includes a description of the slated legislative changes as a “crisis” when the “‘fiscal cliff’ would squeeze hundreds of billions of dollars out of the fragile economy next year and, many economists say, send the country back into recession”.  Id.

There’s not a single hint that it may not really be a “cliff”.  That it merely cuts back INCREASES in military spending.  That the sequester, with its cuts to the military, leaves the government with more options for funding NEEDED stimulus spending.  That Congress has all the power it needs to undo any truly harmful components of the sequester.  That Congress can instead consider targeted cuts to lower-income taxpayers to prevent a renewal downward recession trend.  That Congress can instead target spending cuts (and spending) on stimulation of the economy.  That Congress, in other words, has it in its power to help lower-income taxpayers pay for needed consumption and thus to create tax cuts and controlled spending cuts to benefit the lower and lower-middle income classes whose consumption is most needed to drive economic growth.

A little better is Evan Soltas, A Gentler Slope for the ‘Fiscal Cliff’, (Nov. 19, 2012), in which he admits the siren-call of the term to journalists.

The vivid imagery and false urgency of the [fiscal cliff] term transformed budget arcana into a national Wile E. Coyote moment. The words lent themselves to media overexposure and political opportunism. Despite efforts by Chris Hayes, Ezra Klein and Suzy Khimm to rebrand it the “fiscal curb” or “austerity crisis” — either of which would be more consistent with reality — Bernanke’s original phrasing has held fast.  Id.
Soltas at least explores the benefit of avoiding drastic austerity measures and even considering an “alternate” path of increasing the tax take beyond the “historic” measures of 18-19% of GDP.  Remember, we are currently at all-time lows in the perecentage of GDP taken in federal taxes, due especially to the enormously preferential rates to the super-elite through taxation of capital gains, dividends and private equity compensation (that is, “carried interest”) at less than half the top rate on ordinary compensation.

A reasonable solution might be a combination of spending cuts and revenue increases which stabilizes both at 18 or 19 percent of gross domestic product. That would be in line with their 50-year historical average. Increases or decreases beyond this level demand larger arguments about the proper size and role of government.

Alternatively, one could contend that demographic shifts — namely, the growing elderly fraction of the population — or rising health care costs justify greater public resources without any moral claims about government’s proper size. There is merit to this argument, but it neglects the revenue side of the historical consensus on the taxes paid to the federal government.
The relevance of any “historical consensus” on the percent of GDP that should be paid to the federal government, however, is questionable.  The times are extraordinarily different, with the years of low tax intake from the Reagan tax cuts through the Bush tax cuts, coupled with the unprecedented problem of the Bush preemptive wars being fought without the historical use of wartime increases in tax cuts (especially on the rich) to pay for them.
Maybe one of the better articles is a pre-election discussion at on the “Fiscal Cliffhanger“, Sept. 26, 2012.  Here at least there is a good graphic demonstrating just how significant the Bush-era tax cuts are in our deficit problem ($221 billion) and how little the cut to support for Medicare payments to providers is ($11 billion).  Perhaps this kind of graphic can get the upper-middle class Americans to consider their fair-share obligation. (That means couples, like most professionals such as myself, who make more than $100,000 a year but less than the $250,000 or more a year that Obama has taken as his targeted income level for reintroducting pre-Bush era taxes.)  Further, the article acknowledges that gridlock in the lame duck is quite possible, but goes on to note that there will likely be a resolution–with compromise on both sides–early in 2013.
Many progressives–in which group I include myself– do think that a clean sweep start to the new session could allow Congress to act more reasonably on our long-term fiscal needs without compromising measures needed to continue moving us out of the Bush recession. 
Once the Bush tax cuts are gone and the sequester starting to take effect, Congress could  enact piecemeal legislation.  It could pass new, better targeted tax cuts for the lower-middle and lower income distribution.  Hopefully Obama, now in office and not needing to protect his electoral future, will recognize the reasonableness of allowing some tax increases to take place in four-or five- years for those couples in the $100,000 to $250,000 taxable income set. 
Once the sequester is starting to roll in, Congress could move to reinstate public pension support.  It could consider long-term support for Medicare through gradual adoption of a single-payer, Medicare-for-all system that meets the real needs of the future rather than using an artificially created fiscal crisis to destroy the New Deal programs.  It could accept the sequester’s limited spending increases for the military.  It could even finally act to reduce the tax-and-spending subsidies for Big Banks (get rid of the active financing exception to Subpart F), Big Pharmacy and Big IT (legislate new international tax rules that undo the tax evasion that current  “affiliated sales” of intellectual property permits while reining in the ability of MNEs to locate their profits in offshore tax havens with sophisticated tax planning like the “Dutch sandwich” techniques), and Big Oil and Big Agribusiness (outright subsidies built into well-lobbied tax and spending provisions).

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More Meta Analysis

Nate Silver is all the rage, but when Dean Baker tweeted “Excellent #WAPO article” 

I had to read it.  To me the hero of the article is a meta analyst who used data collected by others to discover that Avandia causes increased risk of heart attacks.  Meta analysis, and the name is Nissen.

To see whether his suspicions were warranted, [Steven E.] Nissen, with colleague Kathy Wolski, set out to assemble the data from every trial of Avandia that they could find. The more data they had, the more likely they could accurately gauge the risks. The drugmaker refused Nissen’s requests for data, but because of litigation brought by Eliot Spitzer, then New York’s attorney general, the company had been forced to make some of it public. In all, he discovered the summaries of 42 trials — 35 of them unpublished. Most of them had been sponsored by Glaxo.

After analysis, the results were stark: Avandia raised the risks of heart attack by 43 percent and of death from heart problems by 64 percent.
Nissen and Wolski submitted their findings to NEJM on May 2, 2007.
Normally, an article takes several months to get published, but Drazen put it on a fast track, publishing it on the NEJM Web site 19 days later, on May 21.

It is also true that the reporter did a very thorough job on an important but complicated topic and that Journal editors are trying to deal with the problem (and not just by getting a manuscript out in 19 days see below)  and Eliot Spitzer is a hero in spite of trouble keeping his pants on.

I read about the problem of pharmaceutical company money distorting science in an article written by two editors of the New England Journal of Medicing the already retired Arnold Relman and the then editor in chief Marcia Angell.  Angel is still actively warning of the danger and is quoted in the article.

Importantly the value of meta analysis is recognized and regulators and journal editors have made sure it is possible (and I learn are going further)

Medical journals have also acted in concert. In 2004, [NEJM  Editor in Chief Jeffrey M.  Drazen and editors at other journals made it much harder for companies to hide unflattering experiments, requiring drugmakers to register a summary description of their trials in a public database.

“The drug companies went nuts about requiring registration,” Drazen said. “They said, ‘That’s secret information.’ We said, ‘That’s bull—-.’ 

I like Drazen’s prose style too.  The point of this post was going to be that the Clinical Trials Register makes meta analysis possible and that data nerds should get on it. Only reading the article did I learn that Nissen and Wolski were way ahead of me (I also recall  an excellent meta analysis of anti depressant trials using data from the registry which I read in the NEJM — this is one of my actual fields of actual research).

Now I learn that even more data will be made available

In the wake of controversies arising around Vioxx, Avandia and Celebrex, many in the medical world have sought ways to ensure that drug research is free of commercial bias.
One of the leading proposals would be to compel drug companies to release all of the data from trials of drugs that are on the market.

Over the summer, the European Medicines Agency — the continent’s counterpart to the FDA — said it will move toward requiring the release of all such data. Glaxo, too, has said it is preparing for such a release, though other companies have yet to follow suit.

Data freeks take note.

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Systematic document forgery and fabrication

Yves Smith at continues to point us in the direction of property ownership and the fallout from the widespread disregard of law in establishing title to property in her post Systematic document forgery and fabrication at Naked Capitalism:

The Department of Justice and the state of Missouri have each announced criminal plea bargains with one Lorraine Brown, former chief executive of DocX, the Lender Processing subsidiary best known for its price sheet for fabricating the mortgage documents a servicer, or frankly, anyone would need to claim they had standing to foreclose on your home. Funny how that particular DocX product was mentioned no where in the plea deals.

Brown admitted guilt to perpetrating a six-year scheme, from 2003 to 2009 to forge and falsify over a million signatures, including now-infamous practices such as “surrogate signing”, in which other employees, typically temps, would forge the signatures of robosigners. The federal penalties are up to five years in prison plus $250,000 in fines; the Missouri penalties re two to three years in prison.

Several things are striking about this deal. First is that it appears that the Missouri suit against Brown goaded the Feds to join. It’s hardly unheard of for state regulators to embarrass their Federal counterparts into action, and the DoJ probably could not afford to sit out a successful prosecution on its beat, particularly after all the noise the Obama Administration has made about its new, improved anti mortgage fraud efforts. But that makes the second item more striking: how the “statement of facts” presents Brown as deceiving Lender Processing Services about her illegal actions. Brown is thus a rogue executive whose misdeeds presumably don’t have bigger implications for LPS or the industry. It’s nauseating to see the filings take that position and contain statements like this:
When hiring DocX to sign documents, servicers typically issued special corporate resolutions delegating document execution authority to specific, authorized, and trained personnel at DocX. The DocX employees who were given express signing authority from DocX’s clients and who, as represented by Brown, were purportedly trained to ensure that the clients’ documents were properly created, signed, and notarized were called “Authorized Signers.” These documents were then generally recorded by DocX with the appropriate local property recorders’ offices throughout the country.
Read more at Naked Capitalism

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1/24/12 Links worth noting: Germany rejects Swiss banking secrecy deal; Labor Devaluation

1/24/12  Links worth noting by Linda Beale:

Germany rejects Swiss banking secrecy deal;   Labor Devaluation 

David Jolly, German Lawmakers Reject Swiss Tax Deal, New York Times (Nov. 23, 2012).
The US and other countries like Germany have been pressing the Swiss on their bank secrecy, which allows U.S. and other foreign citizens to establish bank accounts without the knowledge of the home country and thus hide assets and income from home-country taxation.  The US passed laws (called by the acronym “FATCA”) that require foreign banks to actively report information on US accountholders.   The hope is that every country will recognize the harm done to tax systems by banking secrecy and join in imposing similar information-reporting requirements.

The Swiss, meanwhile, have been trying to circumvent universal adoption of such laws.  See, e.g., Nicholas Shaxson, A scheme designed to net trillions from tax haves is being scuppered, (Nov. 22, 2012).   Britain, Luxemburg and Austria are cited as being in the forefront of the scuttling movement:  Britain, for example, has entered into a “Rubrik Agreement” with the Swiss.

The Swiss thought they had a deal with Germany.  This would be a bilateral deal in which the Swiss agree to an upfront payment in lieu of any back taxes on the accounts and then agree to act as tax collector for the foreign government on the accounts, thus maintaining secret the identity of the foreign taxpayers.
Such an agreement is problematic for two reasons:  (i) it requires the foreign government to trust the Swiss banks to pay the right amount over in taxes and (ii) it undermines the drive to eliminate offshore banking secrecy as a cover for tax evasion.

Transparency in international banking and taxation matters would require that banks provide information on accounts held by foreigners to the foreigners’ home jurisdictions, without any account-specific or accountholder-specific request required.  The reason for a more transparent rule is that otherwise the home jurisdiction has to have information it does not have (who has an account at a Swiss bank) before it can ask for the information it needs to ferret out who has such an account and may be engaging in tax evasion.  The biggest cracks in banking secrecy have thus come from  whistleblowers and opportunists who sell account-holder information to purchasing jurisdictions.

Friday, the Germans rejected–for now at least–a German-Swiss deal supported by Chancellor Merkel that had been two years in the making.  France is apparently also considering rethinking a similar deal.
The Swiss leverage was clearly stated by Swiss banking official Mario Tuor, who “noted that without a deal, the status quo would remain: German officials can seek specific information from the Swiss government on people suspected of tax evasion, or go back to buying data stolen from Swiss banks. ‘With an agreement, every German taxpayer in Switzerland would be taxed,’ Mr. Tuor said.” German Lawmakers Reject Swiss Tax Deal

The Steady Devaluation of Labor, Two Half Hitches (Feb. 2012).

This is an oldie but goodie, one worth reminding you of (or calling to your attention for the first time).
[The] minimum wage, in constant dollars, has had its ups and downs since 1970 but the overall trend indicated by the straight black line is down. The numbers show that the American economy puts less value on the entry level worker than it did in 1970. Why is that? Are minimum wage workers less intelligent now than they were forty years ago? Are they lazier?

The reason probably has a lot to do with the rise of the global economy and cheaper Chinese labor. It may also have to do with basic attitudes toward labor. Some see labor as a commodity, while others believe it is not. 

Representative Steve King (R-IA) on the floor of the House of Representatives last year:

“Labor is a commodity just like corn or beans or oil or gold, and the value of it needs to be determined by the competition, supply and demand in the workplace.”

Samuel Gompers, cigar maker-turned-labor organizer and founder of the American Federation of Labor in the early 20th Century, had a different business ethic related to labor and said this:

“You cannot weigh the human soul in the same scales with a piece of pork.”

Labor advocates actually managed to insert a statement affirming the status of human labor in the 1914 Clayton Antitrust Act“The labor of a human being is not a commodity or article of commerce.”

cross posted with ataxingmatter

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The Miasma School of Economics

I’ve been reading Steven Johnson’s The Ghost Map, about the London cholera epidemic of 1854, and one passage reminded me exactly of today’s economics discipline.

The sense of similarity was heightened because I also (instigated by Nick Rowe) happened to be reading Mankiw’s micro textbook section on the rising marginal cost of production — a notion that 1. is ridiculous on its face, 2. is completely contrary to how profit-maximizing producers think, and 3. is based on just-plain incorrect math.* It’s just one of many central pillars of “textbook” economics that are still being taught with a straight face, even though they been resoundingly disproved by the discipline’s own leading practitioners, on the discipline’s own terms, and using its own language, constructs, and methods. These zombie ideas just won’t die. (Or to quote my friend Ole, “People never learn, and they never forget.”)

Economics today has a profound resemblance to medicine before the germ theory of disease.

Lots of people in 1854 were trying to figure out what caused cholera, and how it was transmitted. The dominant theory was “miasma” — basically bad air emanating from smelly, unsanitary conditions, especially in poor areas with lots of leaking, overflowing basement cesspools full of shit. These were contaminating the water supply, of course, so the real transmission mechanism was people drinking the effluent from previous victims.

The solution to the miasma problem? Empty the cesspools into the Thames — systematically poisoning the water supply. Yes, that’s what they did.

The miasma theory had incredible staying power, even though it was clearly and patently disproved by the thousands of Londoners whose vocation was slopping through the sewers, day and night (presumably in the thickest of possible miasmas), searching for anything valuable that they could sell. They didn’t get cholera or die at any greater rate — perhaps even less.


Why was the miasma theory so persuasive? Why did so many brilliant minds cling to it, despite the mounting evidence that suggested it was false? … Whenever smart people cling to an outlandishly incorrect idea despite substantial evidence to the contrary, something interesting is at work. In the case of miasma, that something involves a convergence of multiple forces, all coming together to prop up a theory that should have died out decades before. Some of those forces were ideological in nature, matters of social prejudice and convention. Some revolved around conceptual limitations, failures of imagination and analysis. Some involve the basic wiring of the human brain itself. Each on its own might not have been strong enough to persuade an entire public-health system to empty raw sewage into the Thames. But together they created a kind of perfect storm of error.

Miasma certainly had the force of tradition on its side. … Just about every epidemic disease on record has been, at one point or another, attributed to poisoned miasma. …

But tradition alone can’t account for the predominance of the miasma theory. The Victorians who clung to it were in almost every other respect true revolutionaries, living in revolutionary times: Chadwick was inventing a whole new model for shaping public health; Farr transforming the use of statistics; Nightingale challenging countless received ideas about the role of women in professional life, as well as the practice of nursing. Dickens, Engels, Mayhew — these were not people naturally inclined to accept the status quo. In fact, they were all, in their separate ways, spoiling for a fight. So it’s not sufficient to blame their adherence to the miasma theory purely on its long pedigree.

The perseverance of miasma theory into the nineteenth century was as much a matter of instinct as it was intellectual tradition. Again and again in the literature of miasma, the argument is inextricably linked to the author’s visceral disgust at the smells of the city. The sense of smell is often described as the most primitive of the senses, provoking powerful feelings of lust or repulsion…

I think it’s worth pointing out here the work of Jonathan Haidt et al showing that conservatives have a big “purity” and “disgust” dimension to their moral roadmap, a dimension that is largely absent or far more muted among liberals. Which leads to…

Raw social prejudice also played a role. Like the other great scientific embarrassment of the period – phrenology — the miasma theory was regularly invoked to justify all sorts of groundless class and ethnic biases. … The predisposing cause lay in the bodies of the sufferers themselves. That constitutional failing was invariably linked to moral or social failing: poverty, alcohol abuse, unsanitary living. One alleged expert argued in 1850: “The probability of an outburst or increase during [calm, mild] weather, I believed to be heightened on holidays, Saturdays, Sundays, and any other occasions where opportunities were afforded the lower classes for dissipation and debauchery.”

So disease epidemics are clearly the result of the 40-hour work week. You can find the modern-day equivalent in John Cochrane and Casey Mulligan’s assertions that today’s unemployment has nothing to do with the high job-seeker-to-job-opening ratio (caused by lack of demand for producers’ goods, and their ensuing non-need for more workers), but rather results from workers being unwilling to work at low wages (and being coddled by government programs).

Like much of the reasoning that lay behind the miasma theory, the idea of an inner constitution was not entirely wrong; immune systems do vary from person to person, and some people may indeed be resistant to epidemic diseases like cholera or smallpox or plague. The scaffolding that kept miasma propped up for so long was largely made up of comparable half-truths, correlations mistaken for causes. Methane and hydrogen sulfide were in fact poisons, after all; they just weren’t concentrated enough in the city air to cause real damage. People were more likely to die of cholera at lower elevations, but not for the reasons Farr imagined. And the poor did have higher rates of contagion than the well-to-do, but not because they were morally debauched.

Likewise, there are many valid and semi-valid ideas, theories, and constructs floating around in the world of textbook economics. But they are so intertwined with, caught up in the miasma, or phlogiston, or epicycle theories that today constitute mainstream economics (think: equilibrium, rational expectations, etc.) that it’s hard for even the clearest-eyed economist — much less the everyday person or Washington staffer, legislator, or policy wonk — to tell the shit from the shinola.

Without trying to take the metaphor too far, I’d like to suggest that today’s austerians are in favor of emptying the cesspools into the water supply — based on similarly loopy reasoning.

* The rising marginal cost theory is ridiculous on its face because it assumes that producers add one factor of production at a time — hire more workers, for instance, without renting more space for them to work. (This is exactly what Mankiw describes in his textbook; see “Thirsty Thelma’s.”) Voila! Each worker’s productivity declines. This is of course not what producers do, which is why only 11% of top-corporation execs say they face rising marginal costs of production. (I’m wondering if that 11% made the mistake of taking an intro econ class in college.) For a nice recap of that executive survey, and the faulty math of rising marginal costs, see here (PDF).

Cross-posted at Asymptosis.

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Bill McBride, Krugman, and Business Insider

Congratulations Bill.

Joe Weisenthal at Business Insider offers some hyperbole in The Genius Who Invented Economics Blogging Reveals How He Got Everything Right And What’s Coming Next, but also offers well deserved praise for Bill McBride and Calculated Risk.  Paul Krugman in the NYT posts  All Hail Calculated Risk and praises Bill’s work as well.

Bill has a gift for telling an evolving story in graph form that readers can follow over time, such as this one on jobs, and picking data that has held up over time as well as being useful. (Economist Spencer England praises Bill’s data in our own Employment Situation Reports this year)

As Bill makes clear on his website, Tanta was an important part of Calculated Risk beginnings. (See Ken Houghton’s note here).

With unabashed enthusiasm I am happy to highlite that Bill was a Bear until moving to his own site full time in late 2005.

Here are some Angry Bear  links posted by CR  from those times.  A bit of fun to color this post with some reflected glory.

A Regulatory Substitute to Burst Housing Bubble? ,  When will housing slowdown

Housing update ,   Housing and recession ,  After the housing boom impact on the economy

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