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

## Tillerson Economics and the Saudi Arm Deal

ProGowthLiberal concludes ‘no net increase’ on Saudi Arabian arms deal:

The \$109 billion in arms sales is for the next decade amounting to an additional \$11 billion in new exports on a per annum basis. So we are talking about only 0.06% of GDP in new exports but this only gets worse if we take Tillerson at his word that as the Saudis spend more on their own defense, we spend less. In other words, exports rise by \$11 billion per year and Federal purchases fall by \$11 billion per year. Good news from a deficit hawk perspective but no net increase in U.S. aggregate demand. So Trump’s “jobs, jobs, jobs” amounts to nothing but his usual political posturing.

## Output Optimum and the Roller Coaster of Immiseration

Following up on my post from two weeks ago, Immiseration Revisited, I built a spreadsheet replica of the marvelous Chapman diagram. In addition to lines on the page, the replica provides me with tables of numbers that I can add, subtract, multiply and divide in accordance with the conceptual logic of the diagram.

The chart below shows the results of some of these calculations. The red curve graphs cumulative gross “output” and green curve subtracts the value of foregone leisure and the pain cost of fatigue and wear and tear from output to calculate net “income” (green). The length of each vertical line measures the values of output and income, respectively for a work week of the length indicated by the scale on the x-axis.

 “Big Dipper”: the Roller Coaster of Immiseration

I have set the hypothetical “output optimum” work week at 48 hours in deference to the diagram’s 1909 vintage. Assuming such an optimum and taking the conceptual diagram’s proportions literally, the ideal length of a work week for a laborer would be 36 hours. That is the point at which the value of foregone leisure and the pain cost of additional work begin to outweigh the additional earnings from the longer week. A workweek of 40 hours marks the threshold beyond which the value of foregone leisure alone exceeds the additional wage earnings.

If the optimal output workweek was 40 hours, the corresponding ideal length of workweek for the worker would be 30 hours, again assuming the reasonableness of the diagram’s proportions. There is, of course, only impressionistic evidence for the general shape of the curves and not for the accuracy of the proportions depicted. Nevertheless, the derived calculations indicate a steep acceleration of the discrepancy between output and worker welfare beginning well in advance of the output optimum.

Calculations based on the diagram suggest that by working 34 percent more hours per week, the employee can look forward to “enjoying” 29 percent LESS net benefit. If the actual cost to workers of working longer is even half or a third of those estimates, this still would represent a significant deviation not only from what Lionel Robbins dismissed as “the naïve assumption that the connection between hours and output is one of direct variation” but also from the equally indefensible premise of a consistently proportional relationship between work effort and reward.

(Most) Economists Balk

In a recent article, “Whose preferences are revealed in hours of work,” John Pencavel noted the “radical change in economist’s thinking about working hours” following the 1957 publication of H. Gregg Lewis’s article, “Hours of Work and Hours of Leisure,” Earlier textbooks attributed reductions in hours to pressure from trade unions, either directly through collective bargaining or by legislation promoted by organized labor. The earlier textbooks also addressed the effect that hours of work have on productivity, with reductions in hours usually leading to increases in hourly output and sometimes even to “no decline in total daily output.”

In later textbooks, the orthodoxy followed Lewis’s explanation that workers choose their own hours, based on their preferences for income or leisure. The connection between output and shorter hours vanished, as did the role of trade unions in achieving reductions of working time. But, Pencavel wondered, “If ’employers are completely indifferent with respect to the hours of work schedules of their employees,’ [as Lewis had posited] why did employers oppose so resolutely workers’ calls for shorter hours?”

In a footnote, Pencavel also mentioned that in Lewis’s 1957 model, employers face no obstacle “to replacing shorter hours per worker with more workers.” This is an interesting point because many economists’ arguments against the employment potential of shorter working time rest on claims that workers and hours are not suitable substitutes. That conclusion is reached by smuggling back in the output/hours relationship concealed in a Cobb-Douglas production function with the Robbins/Hicks “simplifying assumption” that the current hours of work are optimal for output, so that any reduction of hours would result in a reduction of output. It is difficult to imagine how both of these things can be true at the same time.

Although the earlier textbooks and economists acknowledged the connection between hours of work and output, most were silent on the discrepancy — or at least the magnitude of the discrepancy — between an output optimum and worker welfare. Cecil Pigou, Philip Sargant Florence, Lionel Robbins, John Hicks and Edward Denison treated the output optimum as the economic ideal. Richard Lester and Lloyd Reynolds, authors of “institutionalist” labor economics textbooks, showed more sympathy to trade union arguments but did not emphasize the discrepancy between the output optimum and worker welfare.

Sydney Chapman clearly distinguished analytically between worker welfare and the output optimum but his presentation was obscured by digressions that dwelt on shift-work as a palliative and on the philosophical necessity of paying more attention to the non-tangible aspects of culture. Clyde Dankert clearly distinguished between the output optimum and worker welfare but had the rather eccentric view that although “maximization of worker satisfactions” rather than output should be the social objective, shorter hours would have to be postponed “in view of the current cold war situation.” Only Maurice Dobb clearly and concisely stated what was at stake (although he left out the increasing value of leisure):

…trade unionists in the nineteenth century were severely castigated by economists for adhering, it was alleged, to a vicious ‘Work Fund’ fallacy, which held that there was a limited amount of work to go round and that workers could benefit themselves by restricting the amount of work they did. But the argument as it stands is incorrect. It is not aggregate earnings which are the measure of the benefit obtained by the worker, but his earnings in relation to the work he does — to his output of physical energy or his bodily wear and tear. Just as an employer is interested in his receipts compared with his outgoings, so the worker is presumably interested in what he gets compared with what he gives. A man who works longer hours or is put on piece-rates, and increases the intensity of his work as a result, may earn more money in the course of the week; but he is also suffering more fatigue, and probably requires to spend more on food and recreation and perhaps on doctor’s bills.

To compare “what s/he gets” with “what s/he gives” requires above all some way of estimating the value of what is given relative to what is being received. One may even suggest that constructing those estimates was the job economists should have been doing instead of castigating trade unionists and other advocates of shorter hours for adhering to a vicious “lump-of-labor” fallacy. Heck of a job, economists!

## Dean Baker’s Articles on Healthcare

Barkley has mentioned this particular article several times now. I would be negligent if I did not post a link to it so we could read it. New Health Care Plan: Open Source Drugs, Immigrant Doctors, and a Public Option, 25 March 2017, CEPR, Beat The Press, Dean Baker.

There are two obvious directions to go to get costs down for low- and middle-income families. One is to increase taxes on the wealthy. The other is to reduce the cost of health care. The latter is likely the more promising option, especially since we have such a vast amount of waste in our system. The three obvious routes are lower prices for prescription drugs and medical equipment, reducing the pay of doctors, and savings on administrative costs from having Medicare offer an insurance plan in the exchanges.

This short article is worthy of a read also. Why Do Proponents of More Immigration Never Mention Doctors? 08 February 2017, CEPR, Beat The Press, Dean Baker.

If we got the pay of our doctors down to the levels in other wealthy countries it could save us close to \$100 billion a year.

More on Healthcare to follow.

Tags: ,

## “It’s The Economy, Stupid!”: The Iranian Presidential Election

by Barkley Rosser

“It’s The Economy, Stupid!”: The Iranian Presidential Election
“It’s the economy, stupid!” quoth James Carville back in 1992, adviser to Bill Clinton during his successful presidential election campaign then. And so quoth Stella Morgana in an informative piece written a few days ago prior to and about the Iranian presidential election as linked to by Juan Cole The Iranian Election: It’s the Economy, Stupid!. For those who have not seen it yet, incumbent President Hassan Rouhani has won decisively with 57% of the vote over his main rival, Ebrahim Raisi, who got 38.5%. Rouhani is viewed as a moderate in the traditon of former president Khatami, who is under house arrest, while Raisi was supported by hard line clerics and the supreme leader, Ali, Khamenei. Many view Raisi as a potential successor to Khamenei.

## A thought for Sunday: the Left is winning the battle of ideas. The right’s own man says so

by New Deal democrat

A thought for Sunday: the Left is winning the battle of ideas. The right’s own man says so
Prof. Arnold Kling, a conservative neoclassical economist who has taught at George Mason University and been affiliated with the Cato Institute, has a post up this morning in which he  reflects upon whether he has changed his mind about anything in view of developments over the last sum of years. His reply is a notable bellwether:

I think that in general I have become more pessimistic about American political culture ….

…. What has [ ] transpired …… from college campuses [is a] view that capitalism is better than socialism, which I think belongs in the mainstream, seems to be on the fringe. Meanwhile, the intense, deranged focus on race and gender, which I think belongs on the fringe, seems to be mainstream…..

…. The Overton Window on health policy has moved to where health insurance is a government responsibility. The Overton Window on deficit spending and unfunded liabilities has moved to where there is no political price to be paid for running up either current debts or future obligations. The Overton Window on financial policy has moved to where nobody minds that the Fed and other agencies are allocating credit, primarily toward government bonds and housing finance. The Overton Window on the Administrative State has moved to where it is easier to mount a Constitutional challenge against an order to remove regulations than against regulatory agency over-reach.

I would call that a good start.

That being said, as usual I expect progress will be made one funeral at a time, as the deep, deep red Silent Generation (and primary Fox News demographic) passes this mortal coil.

__________

A postscript. Kling concludes by writing:

Outside of the realm of politics, things are not nearly so bleak. Many American businesses and industries are better than ever, and they keep improving. Scientists and engineers come up with promising ideas.

I wonder if it occurs to him that these sentences completely undercut his ideology.  After all, if evil government regulation kills innovation, well, obviously, despite the shifts in the Overton Window to the left, that obviously isn’t happening, is it?

Furthermore, if that innovation has been happening during the period of time that the Brookings Institution found, via comprehensive Social Security wage data, that workers from 1983 on made only 1% more in real terms over their entire 30 year prime age careers than the workers who entered their prime earnings age in 1957, then that innovation has not translated into *any* significant increase in the well-being of average Americans over virtually their entire working lifetimes. That is a thoroughgoing and decisive failure, well worth being replaced.

## FGM in Minnesota

The Minnesota Star Tribute has a bizarre story entitled Minnesota bill against female genital mutilation raises opposition.

It begins:

Opposition from some members of Minnesota’s immigrant and refugee communities is slowing the momentum of a bill that would impose stiff penalties for parents involved in cases of female genital mutilation.

Let’s call it like it is: there are people who are opposed to a law designed to reduce child abuse, and in particular, the abuse of girls.

The Council for Minnesotans of African Heritage, a nonprofit called Isuroon and other groups argue that the legislation carries overly harsh punishment and unintended consequences, including the possibility that newcomers from countries where genital cutting is widespread would not seek medical care and other services for their children. They call for a less punitive approach focused on educating parents.

Tags: , ,

Tags:

## SAVINGS, INVESTMENT & THE DEFICITS

Over the past decade, thanks to fracking, the US has approached self-sufficiency in oil. Since 2008 the trade deficit in oil fell from over half of the overall trade deficit to under 10% in 2016.

Surprisingly, however, the massive decline in the oil deficit did not lead to a contraction of the overall trade deficit. Rather, the non-petroleum deficit expanded to offset the improvement in oil.  Actually, it should not be a surprise as this is a beautiful example of the standard economic analysis that the current account balance  (the trade deficit plus certain capital transactions) equals  the gap between domestic savings and investments.

When it first became obvious that the Reagan tax cuts were going to lead to a very large structural federal deficit, main stream economic forecasters started to talk about crowding out.  If you look at the US economy as a closed system, domestic investments must equal domestic savings and  interest rates are the price that changes to ensure that tat identity holds.

We clearly got a massive increase in the federal deficit as after the Reagan tax cuts the federal deficit exploded from -2% to – 6% of GDP.  Moreover, this occurred during the time of very strong economic growth that should have caused the deficit to contract.  But interest rates did not rise and the crowding out analysis was discredited.  Vice President Cheney even went so far to claim this demonstrated that deficit do not matter.

But the view that savings must equal investments only holds in a closed economy. In those days virtually everyone looked at the US economy as a closed system and ignored the international aspects of the economy. In an open economy, however,  savings does not have to equal investments because foreign capital inflows can finance a gap between savings and investments.  In  a closed economy, interest rates adjust to ensure this identity.  But in an open economy both interest rates and the currency can move to ensure that economic identity prevails.

As the chart shows, the US has sustained a large gap between savings and investments since the 1980s.  Initially, the large federal deficit following the Reagan tax cut was accompanied by a massive 50% surge in the dollar.  This was generated by foreign investors bidding up the dollar as the demand for dollars exceed the supply.  But with a lag, the strong deficit lead to an increase in the current account deficit — the supply of dollars–and the supply and demand for dollars balanced without the dollar rising..  But this analysis brings up another identity that hold in an open economy; the domestic savings-investment gap must equal the current account balance.

As the chart shows, the identity that the savings-investment gap must equal the current account deficit has clearly held over the years.  We had crowding out after the Reagan tax cuts, it just worked through the dollar to hurt the economic sectors exposed to foreign competition  rather than interest rates to impact the interest sensitive sectors.  Moreover, as this analysis shows that the trade deficit is not a function of NAFTA or the other things that President Trump claims.  If you look at the US as an open economy it is obvious that the large  trade deficit and the loss of many manufacturing jobs has been caused by the Republican tax cuts that produced a structural federal deficit, a large domestic-savings gap and the large current account deficit.  Moreover, if Trump is able to implement another round of large tax cuts it will lead to a widening of the domestic-savings gap and  the current account –trade — deficits.  His tax policies will severely damage the American manufacturing worker that elected him in hopes that he could make America great again.

## Did Recep Tayyip Erdogan Make War on the USA ?

I assume the reader is familiar with the recent violence at the Turkish embassy & Turkish ambassador’s residence in Washington DC. “Body guards” (really thugs) brought by Turkish president Recep Tayyip Erdogan attacked peaceful demonstrators. It is clear how the fight started, a rather thin not too tall man in a suit attacked. He has a receeding hairline, a mustache and wore a black suit and a dark blue tie.

Phillip Bump (of the Washington Post) says this is the moment it started.

The striking thing is that seconds earlier someone in the back seat of the car in which Erdogan was sitting said something to a middle aged man who leaned over to hear. That man said something to a young thin man with a receeding hairline and a mustache who was wearing a black suit and a dark blue (or purple) tie. That young man nodded twice and walked off briskly to the demonstration just before the fight started.

He returned a minute later and said something to Erdogan (who had gotten out of the car).

Is this man who takes instructions from someone who took them from Erdogan the man who started the brawl ?

The brawl starts with a man in a suit punching a man wearing a blue t-shirt.

The assailant has a receeding hairline and a mustache

Here @pbump shows the order coming from the car

Here a longer clip shows the young man with a mustache get some instruction, walk briskly towards the demonstration then return and report to Erdogan in person.

Here notice that the man who started the brawl by punching the man in a blue t-shirt leaves (heading generally in the direction of Erdogan) while the brawl continues. Cowardice or mission accomplished ?

These stills are from this youtube video

## Toward a Jobs Guarantee at the Center for American Progress (!)

(Dan here…hat tip NDd for this post.  Very long and well worth reading)

By Lambert Strether of Corrente\

Toward a Jobs Guarantee at the Center for American Progress (!)

I had another topic lined up today, but this (hat tip alert reader ChrisAtRU) is so remarkable — and so necessary to frame contextualize immediately — I thought I should bring it your attention, dear readers. The headline is “Toward a Marshall Plan for America,” the authors are a gaggle of CAP luminaries with Neera Tanden leading and Rey Teixeira trailing, and the “Marshall Plan” indeed includes something called a “Jobs Guarantee.” Of course, I trust Clinton operatives like Tanden, and Third Way types like Teixeira, about as far as I can throw a concert grand piano. Nevertheless, one sign of an idea whose time has come is that sleazy opportunists and has-beens try to get out in front of it to seize credit[1] and stay relevant. So, modified rapture.

In this brief post, I’m going to look at the political context that drove CAP — taking Tanden, Teixeira, and the gaggle as a proxy for CAP — to consider a Jobs Guarantee (JG), briefly describe the nature and purpose of a JG, and conclude with some thoughts on how Tanden, Teixeira would screw the JG up, like the good liberals they are.