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Dynamic Inefficiency

This is a post about macroeconomic theory. It is technical and I honestly don’t know how much is already in the literature. The aim is to address an important policy question — is public debt a burden on future generations.

It is possible in theory that the answer is no and that higher public debt causes permanently higher consumption and welfare. In such a case, it is clear that the low debt market outcome is inefficient, so this is called dynamic inefficiency. The standard result from simple models is that an economy is dynamically inefficient if r is less than g* where r is the real interest rate and g is the rate of GDP growth.

This formula isn’t very useful in the real world, because there isn’t one real interest rate — rather there is a low real interest rate on safe assets and higher rates on risky assets. The standard interpretation of “r” is that it refers to the ratio of total capital income to total capital. A lot of this r is not called interest at all since the claim on the income is equity not any kind of loan or bond.

The question of interest is whether increased public debt can cause increased welfare when the safe real interest rate (r1) is lower than g but the average return on capital (r2) is greater than g. I think the answer is yes, so I think it is plausible that, in the real world, greater public debt will cause permanently higher welfare.

I stress that I am not talking about any benefits of government spending which can be financed by the debt — the result would hold if the bonds are just given (that is the deficit is due to tax cuts) and the result is that people who weren’t alive at the time of the tax cut would benefit. Also it is assumed that wages and prices are flexible and markets clear (there is no unemployment) so the benefits of public debt have nothing to do with Keynesian stimulus.

This post was supposed to link to a pdf with models and proofs, but I can’t force myself to write the pdf without publicly promising it will exist. I will sketch the argument and 3 models after the jump.

update: the pdf with boring equations and a model which owes a lot to a comment by Nick Rowe is here

update 2: A new extended pdf with more boring equations is here

* in an earlier version this “r less than g” was rendered as “r” . html problem resolved thanks to Warren in comments.

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More to the Story on Killing the VHA

run75441: Ater I posted my article on the VA, it received a comment from

Suzanne Gordon

who writes on healthcare and has covered VA healthcare at her blog and also at American Prospect; Unfriendly Fire Fall 2015. Unfriendly Fire discusses the VHA coming under severe criticism from Libertarian ideologues and conservative right wing politicians even though the VHA offers far better care than what the commercial healthcare system offers. I would urge you Suzanne Gordon’s article on American Prospect.

I also checked out Suzanne Gordon’s blog and her latest post. She was discussing the 15 member Commission on Care put in place after the made up Phoenix scandal claiming 40 veterans died while waiting for an appointment (never happened in the manner described or happened at all). It appears a gang of seven members of the commission have taken it upon themselves to meet in private away from the other 8 members and drew up a proposal to eliminate the VHA by 2035 rather than strengthen it. Besides meeting secretly and outside of the public-eye together which may be a violation of the Federal Sunshine Act, the commission gang of seven met with Congressmen Jeff Miller and Paul Ryan.

Congressman Jeff Miller is the House Veterans’ Affairs Committee chairman and a staunch advocate of privatizing the Veterans Health Administration who has decided to interfere with the congressionally appointed Commission on Care not only by meeting privately with select members of the commission but also by writing a stern letter criticizing the one member of the Commission veterans can count on, Phillip Longman. First lets point out in reading Congressman Jeff Miller’s biography, it does not appear he is a military veteran of any type. Yet, he has claimed intimate knowledge of what veterans would and would not accept. For example, he believes veterans would agree with him the VA should be under funded and would reject an increase in US debt to fund the VHA so it could provide better services for veterans. Simple answer Congressman Miller, this veteran believes you should sponsor an increase in taxes on the upper income bracket you and the Republicans have favored over veterans.

I think most veterans (including myself) realized the last administration underfunded the VHA about the time an influx of Iraq and Afghanistan veterans were hitting the VHA’s doors and many aged Vietnam veterans needed more care also. Besides attending private meetings with a portion of Commission members, Congressman Jeff Miller has chosen to attack Phillip Longman, a supporter of all veterans being able to receive healthcare under the VHA besides funding the VHA properly. Again, it does not appear Congressman Jeff Miller is a veteran of any type. Yet while attacking Phillip Longman (who helped expose the truth) and calling the Washington Monthly article and Phillip Longman’s editorializing fabrications; Congressman Jeff Miller feels it is ok to meet privately with 7 members of the VHA Commission. Please take a moment and read Congressman Jeff Miller’s attack letter on Phillip Longman to the chairman of the VA Commission on Care Nancy Schlichting. There are flagrant and intentional inaccuracies in Congressman’s Millers letter which I will go through at a later time.

I dally here in anger and I want to move the readers on to Suzanne’s blog post “Secret Group Trying to Kill VHA” on the topic.

Suzanne Gordon

This has been a pretty amazing week in D.C. when it comes to healthcare. We just discovered about a secret cabal — made up of right wing ideologues and hospital executives with a huge financial stake in VHA privatization –within the VA Commission on Care. The group has been promoting a plan to totally privatize the VHA. I wrote about it on The American Prospect blog. Please read and be alarmed and act to protect the VHA.

Deliberations by the VA Commission on Care, the congressionally mandated group planning the future of the Veterans Health Administration, have, as The American Prospect has reported, become increasingly marred by controversy. When the 15-member commission met in Washington in mid-March, another furor erupted. A recently uncovered proposal to privatize the VHA set off a firestorm of protest within the veterans community.

Several members of the commission learned that seven of their colleagues had been secretly meeting to draft a proposal to totally eliminate the Veterans Health Administration by 2035 and turn its taxpayer-funded functions over to the private sector. Those commissioners dubbed the plan “The Strawman Document.”

The authors of the Strawman Document insist that the VHA is so “seriously broken” that “there is no efficient path to repair it.” Although the commission’s work is supposed to be data-driven and done by the all the commissioners together, the faction meeting independently of the full commission has ignored many of the studies that indicated that treatment at the VHA is often better and more cost-effective than the care available in the private sector.

It is not surprising that the Strawman group has chosen to ignore this research—its members have a vested interest in dismantling the VHA. The Strawman authors include Darin S. Selnick, a part-time employee of the Koch-funded group Concerned Veterans for America, as well as Stewart M. Hickey, a former leader of Amvets, a group that broke away from a coalition of large veterans service organizations because of its support for Concerned Veterans’ interest in dismantling the VHA.

The Strawman authors acknowledge that private-sector health-care systems do not provide integrated care, high-quality mental-health treatment, or many other specialized services that the VHA currently delivers. But if the VHA became an insurer—paying the bills instead of providing direct care—it could spend more money trying to “incentivize” providers to give better care in these areas.

Private hospitals would also get federal funding to run what are now VHA Centers of Excellence, which treat epilepsy, Parkinson’s disease, and other conditions veterans face.

Representatives of veterans service organizations (VSOs) believe the secret meetings of the Strawman group may violate the Sunshine and Federal Advisory Committee Acts, as well as the commission’s agreed-upon processes. The commission had set up working groups to consider key VHA issues. Unlike the secret Strawman meetings, the subcommittee members were well known by all members and the public. Meeting times were posted, and discussion minutes were recorded.

The Strawman faction engaged in another end run around their colleagues when they met with Republican Representative Jeff Miller, chair of the House Veterans’ Affairs Committee, and Speaker Paul Ryan. One representative of a major VSO, who asked not to be identified, observes: “If the authors requested the meeting with the House leadership, that constitutes lobbying. If they were invited by the House leadership, that constitutes more interference into the commission’s deliberations. Either way, this meeting, funded by the U.S. taxpayer, was totally inappropriate.”

“The plan does represent a complete deflection of responsibility to subject these men and women to an alternative ‘payer-only’ system of care that not only is ill-equipped to absorb the demand but is also, at best, minimally equipped in terms of expertise and the ability to coordinate such complex care over a veteran’s lifetime,” says Sherman Gillums Jr., acting executive director of Paralyzed Veterans of America.

Before the Strawman proposal became public, Disabled American Veterans (DAV) launched Setting the Record Straight—a social media campaign against proposals that would privatize some or all of the VHA. Garry Augustine, DAV’s Washington executive director told the Prospect, “Although we have voiced our views about VA health care for the future, it seems many on the commission are committed to [doing] away with the VA health-care system and turn veterans over to private health care, which we believe would result in uncoordinated and fragmented care for veterans.”

The commission would do far better to consider the views of VA Undersecretary of Health David Shulkin and commission member Phillip Longman. Shulkin has argued for strengthening the VHA and giving it a more active role in directing and coordinating any care veterans receive in the private-sector system. Longman believes that the VHA should serve all veterans—not just those with service-related conditions or those who are low-income veterans.
– See more at: Secret Group Trying to Kill VHA

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Life is about to get much worse

by David Zetland   (assistant professor of economics at Leiden University College in the Netherlands and  his blog is  Aguanomics)

Life is about to get much worse

Climate change is hard for people to understand or take seriously because its FUTURE impacts will be so vast in scale and intensity. It would be easier for people to “believe in”face if its signs were more local and present (one reason I suggested rebranding it “local warming” years ago).

Sadly, it seems that we’re about the arrive in that moment of vast intensity a lot quicker than previously forecast.

Last week, James Hansen (one of the first scientists to bring CC to public attention) and many co-authors published an article (link in this summary) explaining how previous estimates of glacial melting in Antartica and Greenland need to be updated to consider positive feedback effects that are hastening the process. These effects are due to the slowing of ocean circulation that will simulataneously mean warmer seas near the Antarctic ice shelves (helping those glaciers slide into the water more quickly) as well as colder seas near Northern Europe (as the “conveyor” of warm water from the Caribbean shuts down).

The upshot of their estimates (which combine data from a past era that had similar GHG concentrations to today’s except that today’s have accumulated far faster) is that temperatures and storms will be getting much worse in the next 10-20 years (if not now), while sea levels will rise by at least 2m (6 feet) and as much as 6-7m (20 feet) by 2100 — far higher than current IPCC restimates of 1m.
Unleash the kraken

At least it’s not an alien invasion.

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I find this post by Natahnael Johnson even more interesting than their very high average. It is a paean to genentically modified bananas originally published at Grist.

The Grist (and Vox) headline people tease “These vitamin-fortified bananas might get you thinking differently about GMOs”. Johnson should be glad it didn’t get me thinking differently as I have been a raving GMO enthusiast for 35 years.

The claim is that bananas genetically engineered to produce (more) beta carotene will reduce vitamin A deficiency in Uganda. Johnson devotes much of the post to arguing that the bananas will end up in people’s stomachs unlike the golden rice which was a flash not yet in any pans.

I am, of course, convinced. I am especially interested that the post was put up at Grist.

I really don’t have much to add beyond the link.

I guess the only overlap with economics is that the bananas will be public domain, because the research is financed by the Gates foundation not a profit seeking corporation. This is actually necessary for the product to exist, because bananas can be reproduced from shoots, so there aren’t and can’t be profitable banana seed companies.

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7 Million at Risk from Man-made Quakes

Interesting Vox article on natural and manmade earthquakes my fellow Vet and cohort in writing Mark Jamison sent me. This year for the first time ever the USGS is including a map of areas in the US which may be prone to human-induced earthquakes” in addition to areas which are prone to natural earthquakes.

“By including human-induced events, our assessment of earthquake hazards has significantly increased in parts of the U.S.,” said Mark Petersen, Chief of the USGS National Seismic Hazard Mapping Project. “This research also shows that much more of the nation faces a significant chance of having damaging earthquakes over the next year, whether natural or human-induced.”

Natural and Induced Earthquates

From the highest to the lowest potential hazard the USGS has ranked these states: Oklahoma, Kansas, Texas, Colorado, New Mexico and Arkansas. Oklahoma and Texas have the largest populations exposed to induced earthquakes. Small areas of Ohio and Alabama have experienced induced earthquakes; but, this has dropped off with lesser activity. “Wastewater disposal is thought to be the primary reason for the recent increase in earthquakes in the CEUS. While most injection wells are not associated with earthquakes, some other wells have been implicated in published scientific studies, and many states are now regulating wastewater injection in order to limit earthquake hazards.”

Earthquates since 1980 and Recent Areas

Central US has experienced the greatest change in earthquake frequency going from 24 earthquakes per year (1973 to 2008) with an average magnitude of 3.0 to increased frequency year over year 318 per year with a high of 1010 in 2015. From 2009 to 2015, the rate steadily increased, averaging 318 per year and peaking in 2015 with 1,010 earthquakes. The latest data through mid-March shows 226 earthquakes. As fracking and the resulting waste water injection activities picks up in a region, the frequency of earthquakes increases. It is not believed Hydraulic fracking is to be the cause of the increased earthquakes. Testing the maps after one year will verify predictability of location and frequency of earthquakes.

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The Repercussions of Financial Booms and Crises

 by Joseph Joyce

The Repercussions of Financial Booms and Crises

Financial booms have become a chronic feature of the global financial system. When these booms end in crises, the impact on economic conditions can be severe. Carmen M. Reinhart and Kenneth S. Rogoff of Harvard pointed out that banking crises have been associated with deep downturns in output and employment, which is certainly consistent with the experience of the advanced economies in the aftermath of the global crisis. But the after effects of the booms may be even deeper and more long-lasting than thought.

Gary Gorton of Yale and Guillermo Ordoñez of the University of Pennsylvania have released a study of “good booms” and “bad booms,” where the latter end in a crisis and the former do not. In their model, all credit booms start with an increase in productivity that allows firms to finance projects using collateralized debt. During this initial period, lenders can assess the quality of the collateral, but are not likely to do so as the projects are productive. Over time, however, as more and more projects are financed, productivity falls as does the quality of the investment projects. Once the incentive to acquire information about the projects rises, lenders begin to examine the collateral that has been posted. Firms with inadequate collateral can no longer obtain financing, and the result is a crisis. But if new technology continues to improve, then there need not be a cutoff of credit, and the boom will end without a crisis. Their empirical analysis shows that credit booms are not uncommon, last ten years on average, and are less likely to end in a crisis when there is larger productivity growth during the boom.

Claudio Borio, Enisse Kharroubi, Christian Upper and Fabrizio Zampolli of the Bank for International Settlements also look at the dynamics of credit booms and productivity, with data from advanced economies over the period of 1979-2009. They find that credit booms induce a reallocation of labor towards sectors with lower productivity growth, particularly the construction sector. A financial crisis amplifies the negative impact of the previous misallocation on productivity. They conclude that the slow recovery from the global crisis may be due to the misallocation of resources that occurred before the crisis.

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“Post Post Work Post”

As one of those manufacturing people who improve throughput, I often read Sandwichman who writes for “Econospeak BlogSpot I hope you enjoy his analysis of robots replacing humans and the resulting availability of time off. Wait a minute, does a post work society giving time off really take place?

Automation may mean a post-work society but we shouldn’t be afraid, writes Paul Mason at the Guardian. Mason writes, “to properly unleash the automation revolution we will probably need a combination of a universal basic income, paid out of taxation, and an aggressive reduction of the official working day.

Don’t get me wrong. The Sandwichman is all for aggressive reduction of working time. But not because magical robots are going to usher in a Utopian (or dystopian) post-work society.

Let me tell you a secret: although machines are used to produce things, they are not about producing things. They are about power — the power of one human being with a will over other human beings with wills. Exchange value is a manifestation of this power relationship.

Twenty years ago, George Caffentzis explained “Why Machines Cannot Create Value.” His essay began, “Thirty years ago…

…my generation was told by economists, sociologists, and futurologists to expect a society in which machines had taken over most repetitive and stressful tasks and the working day would be so reduced by mechanization that our existential problem would not be how to suffer through the working day but rather how to fill our leisure time.

Twenty years plus thirty years makes fifty years. It might as well be a hundred years or a hundred and fifty. Perhaps fifty years from now some thinker will be predicting that some as yet unheard of technology is about to usher in a post-work society. Don’t believe it.

And no, it’s not because supply creates its own demand or because technology creates more jobs than it destroys.

Why did the most sophisticated analysts of the last generation go wrong and why is there a still continual stream of texts to this day like Rifkin’s The End of Work, which see in technological innovations the promise of a new era of workerless production?
Caffentzis asked in his essay.

And why twenty years later does Paul Mason regurgitate the Rifkinesque fantasy? Caffentzis answers his own question with an examination and defense of “Marx’s original claim that machines cannot produce value” and an update of that claim from the perspective of the late twentieth century. The essay is reprinted in In Letters of Blood and Fire, a 2013 anthology of Caffentzis’s essays.

Caffentzis’s explanation is erudite and probably redundant. Those who have misinterpreted Marx’s argument by viewing it through an economistic lens, will presumably do the same to Caffentzis’s defence of Marx.

That is, when someone insists that wealth refers to a vault full of gold coins and/or a warehouse full of useful stuff, that person will no doubt presume that a labor theory of value refers to some sort of ratio between the coins and the stuff. Thus the critics attribute to Marx the position that Marx fundamentally critiqued. Kill the messenger.

Set aside the coins and the stuff, please. Wealth refers to, on the one hand, disposable time and on the other hand, command over the labor of other people. That is to say wealth expresses a power relationship between people — always a precarious balance between autonomy and coercion. Precarious because “total power” over the other terminates the relationship by murdering the other.

Robots do what they do without autonomy or coercion. They do not desire time off from work “to seek recreation… to enjoy life… to improve the mind.” That which they do not possess — and do not want to possess — cannot be taken from them. Robots are already dead. Thus they cannot create value in the sense of giving up a portion of their autonomy.

This perspective is difficult to grasp not because of any inherent complexity but because it lies outside the distorting frame in which wealth and value are conventionally viewed. But it bears repeating:

Machines cannot creates value because they are already dead.

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