TOE History

Protectionism and the Great Depression

Protectionism and the Great Depression 

Paul Krugman’s Blog November 30, 2009, 9:51 am

[A link to the underlying paper and a graph can be found at  http://krugman.blogs.nytimes.com/ Eichengreen and Irwin.  The underlying paper addresses a slightly different and broader issue regarding the importance of international coordination of stimulus to avoid protectionist reactions to stimulus leakage through imports.]

One thing you hear all the time is that protectionism caused the Great Depression. I’ve always seen this as an attempt at a Noble Lie; there’s no good reason to believe that it’s true, but it has been used to scare governments into maintaining relatively free trade.

But the truth is quite different, as a new paper by Barry Eichengreen and Doug Irwin shows. Protectionism was a result of the Depression, not a cause. Rising tariffs didn’t even play a large role in the initial trade contraction; like the spectacular trade contraction in the current crisis, the decline in trade in the early 30s was overwhelmingly the result of the overall economic implosion. Where protectionism really mattered was in preventing a recovery in trade when production recovered.

So let’s tell it like it was. If free trade is a good idea — which it mostly is — it should be sold on its genuine merits, not with scare stories.

 

A LOOK AT GALBRAITH’S 5 WEAKNESSES THAT MADE THINGS WORSE

John Kenneth Galbraith does not believe that the stock market crash, by itself, caused the Great Depression.  Other factors had to have made things worse.  He mentions five.

                                THEN                                                                                                     NOW

“The bad distribution of income.”  It seems certain that the 5 per cent of the population with the highest incomes in [1929] received approximately one third of all personal income.”  A disproportionate part of income derived from interest, dividends and rent.  This “meant that the economy depended on a high level of investment or a high level of luxury consumer spending or both.”  These are subject to more erratic influences and fluctuation than bread and other basics.	Bad distribution of income has been a recent problem.   A 2006 study of IRS data showed that the share of income held by the top 1% was as large in 2005 as in 1928. Between 1979 and 2005, the average after-tax income for the top 1% increased by 176%, versus + 69% for the top quintile overall, +20/21% for the 3rd & 4th quintile, +17% for the 2nd quintile, and +6% for the bottom quintile.  The share of after-tax income held by the top percentile increased from 7.5% to 14% in the same period.   Wealth distributions are similarly tilted.
“The bad corporate structure.”  In particular, the leveraged structures of holding companies and investment companies exposed major companies to deleveraging.  Shrinking income was committed to debt rather than investment and wages.	Different corporate structure issues.  (a) Under the New Deal, utility-holding-company pyramids were ended, and banks were separated from investment banks and insurance companies—two safeguards that were removed in the last 10 years.  (b) Hedge funds and investment banks repeated the mistakes of excess leverage, as well as playing with products that were divorced from the economic basics.  (c)  There has been an increase in the number of huge investors/money managers competing to show they could earn above-average returns.  They got carried away with investments (sold to them by clever investment bankers) whose risks they didn’t understand.  (d) Corporations are more focused on short-term stock fluctuations than on long-term corporate health, meaning more money spent on stock buybacks and mergers and less on expanding factories (especially in the U.S.).  Layoffs are the first line of “cost control.”
“The bad banking structure.”  Bankers were, in general, not inordinately foolish.  But the system depended on “a large number of independent units.”  “[O]ne failure led to other failures.”   Falling income, employment and values caused widespread bank failures, which, in turn, triggered widespread fear.	Much better banking system with oversight by federal regulators and deposit insurance that virtually eliminates the danger of runs—from traditional banks.  Investment banks, commodity traders, hedge funds, and mixed institutions operated outside the normal reach of federal regulators.  They were able to build up high-risk, highly leveraged portfolios that rapidly deflated, which rapidly spread to their lenders and investors, including the banks.
“The dubious state of the foreign balance.”  Foreign countries ran a persistent trade deficit to the U.S.  To address this imbalance, they could transfer gold or increase exports or decrease imports.  Gold was limited, and increases in U.S. tariffs eliminated increased exports as a solution.  That meant debt defaults and/or reduced purchases from the U.S., which compounded the economic problems for U.S. export industries.	The foreign balance is a mess.  However, it is a different mess.  Now the U.S. runs terrible trade and budget deficits.  Its flexibility to address problems is constrained.  On the other hand, trade is much freer than in 1929 and currencies are able to float without an arbitrary gold standard.  The falling dollar should help our position in the long run—unless we have so outsourced to other countries that we cannot restore manufacturing.  The issue is how much longer can these imbalances remain unresolved and what will be the costs of allowing them to continue building?
“The poor state of economic intelligence.”  Economic counsel in the late 20s and early 30s was “almost uniquely perverse.”  After Hoover cut (already low) taxes to stimulate the economy, the standard policy mantra from both political parties was to “help” the economy by balancing the federal budget, i.e., cutting spending or raising taxes, and fighting inflation by restraining cuts in interest rates.	Economists know much more.  Bernanke studied the Great Depression and showed his learning when he reacted to the collapse of 2008-09.  On the other hand, a long-standing Fed policy of low interest rates probably contributed to the bubbles.  Also, there is talk in many quarters about the “need” now (a) to balance budgets by cutting spending, (b) to fight (non-existent) inflation by raising interest rates soon, and (c) to preserve a “strong dollar.”   These traditional instincts suggest we may not have learned as much as Galbraith imagined.

 

Parallels between the crashes of the 1920s and 2000s

There are numerous interesting parallels between the real estate and stock market booms and busts of the 1920s and our dot-com and recent market crashes of the 2000s.   Quotations and most assertions regarding the 1920s are drawn from John Kenneth Galbraith’s The Great Crash 1929.

1920s                                               2000s

The American people “display[ed] an inordinate desire to get rich quickly with a minimum of physical effort.” (3)	From stock and real estate promoters to state lotteries to some “religious leaders” getting rich easily has been a popular modern theme.
Florida’s land boom  began with an “indispensible element of substance” (i.e., Florida had a better climate than the north),  but soon “men and women had proceeded to build a world of speculative make-believe.” (3) Until 1928, one could rationalize that stock prices were catching up to earnings.  “Early in 1928, the nature of the boom changed.  The mass escape into make-believe, so much a part of the true speculative orgy, started in earnest.” (11	Housing and the internet both have substance, but the values of both were inflated in the minds of investors and commentators.  The dot-com run-ups of prices for companies that had a concept but no market was based on make-believe.
People bought not to occupy the land, but “in the pursuit of effortless riches.” (4)	The speculative buying-and- “flipping” of properties played an important role in the most recent bust.
There was cheap money that could be put into the market although that alone cannot explain the boom because there were other times when money was as cheap or cheaper. (10-11)	The bubbles of the past 10 years both had ample supplies of cheap money.  Greenspan has been much criticized for this.
“[T]he process of assurance—of inventing the industrial equivalents of the Florida climate—eventually achieved the status of profession.”  (11-12) “[T]he time had come, as in all periods of speculation, when men sought not to be persuaded of the reality of things but to find excuses for escaping into the new world of fantasy.” (12)	The enablers of the 2000 bubbles included TV market news show anchors and their guests (e.g., MSNBC), the major investment houses,  authors (“Dow 36,000) and some mutual fund spokespersons.  “Momentum investing” strategies became common, perhaps even respectable.  Even Alan Greenspan endorsed the view that technology had changed business to the point that previous expectations about stock prices (e.g., traditional price-earnings ratios) no longer applied.  "This time is different."  These upward pressures were particularly great in the dot-com bubble.  The most recent boom-bust was fueled to a greater degree by behind-the-scenes enablers who pushed securitized debt instruments to fellow professionals.
“The March boom also celebrated, beyond anything theretofore, the operations of the big professional traders.” (12)	Big money managers and investment houses played both a role in the buying frenzy and in promoting buying by others.
There ‘was a phenomenal increase in trading on margin.” (18)	The hedge funds and brokerage houses went bonkers on margin, especially in connection with the most recent bust.
“[A}t some point in the growth of a boom all aspects of property ownership become irrelevant except the prospect for an early rise in price…. Could the right to the increased value be somehow divorced from the other and now unimportant fruits of possession and also from as many as possible of the burdens of ownership, this would be much welcomed by the speculator…. Such is the genius of capitalism that where a real demand exists it does not go long unfilled.,  In all great speculative orgies devices have appeared to enable the speculator to concentrate on his business.”  (18)  In Florida, it was binders; in the stock boom, it was margins (brokers loans, etc.).	This clearly happened in the 2000s, though many of the tools pre-dated these booms.   Tools included (a) options, (b) derivatives, (c) traditional margin arrangements, (d) futures, and (e) margin arrangements.
Hot stocks that rose rapidly fed the momentum in the stock market; and anything in Florida seemed worth buying earlier.	Technology stocks and IPOs led the way.   Real estate prices also offered grand opportunities for speculators, while investment bankers packaged (and quickly off-loaded) mortgages and other loans for sale to pension funds, endowments and banks anxious to puff up their returns with “safe” investments.
New investment vehicles arise.  In particular the investment corporations, which take money and offer the supposed brilliance of some manager.  These companies leveraged their positions and were often worth far more in the market than the assets they held.	The hedge funds sporting allegedly brilliant money-managers provided the new model for where the “smart money” should go.  Mutual funds, which are valued daily at their assets, played a role but did not generally rely on margin.  Closed-end funds resembled the investment corporations but were too old-fashioned to compete with hedge funds.
Examples of embezzlement , fraud and weaker financial positions than anyone expected.  “One of the great uses of depression is the exposue of what auditors fail to find.  Bagehot once observed: ‘Every great crisis reveals the excessive speculation of many houses which no one before suspected.” (135)	We’ve seen Bernie Madoff, “liar loans”, thinly capitalized and overexposed companies, massive sales of  securitized loans of no known value (even though vouched for by sellers and ratings agencies), sales of securities even after companies knew they were of doubtful value (or worse), and major investment houses that had leverage of over 30-1.

 

“When prices stopped rising—when the supply of people who were buying for an increase was exhausted—then ownership on marking would become meaningless and everyone would want to sell. The market wouldn’t level out; it would fall precipitously.”  (24).	Dot-com prices collapsed.  The decline in housing prices caused the market in CDOs, mortgage-backed securities and other exotic securities to collapse as no one knew the values, no one wanted to buy and no one could sell.  The collapses were mutually reinforcing.  Credit markets froze.
For people who saw that there was wild speculation, “every proposal to act raised the same intractable problem.  The consequences of successful action seemed almost as terrible as the consequences of inaction, and they could be more horrible for those who took the action….A bubble can be easily punctured, But to incise it with a needles to that it subsides gradually is a task of no small delicacy.” (25)  It was clear who would be blamed if someone deliberately acted; less clear if one waited until the burst occurs later on its own.	There were plenty of people who could see that  there were bubbles in this decade.  Neither Treasury nor the Federal Reserve wanted to take the blame for acting.
The Fed had tools that included interest rates to banks and even giving ominous warnings of possible action.  It faked action by meeting regularly “in secret” which deterred speculative fever until that strategy was undercut by an influential banker who was a director of the NY Fed.	Alan Greenspan caused markets to tumble merely by speaking of the possibility that markets were being driven by “irrational exuberance.”   He never did that again.  He also let the world know that, in his view, markets were different now due to enhanced productivity.
The Fed resisted the interest rate option until very late.  It had concerns that raising rates would have economy-wide impacts and might not have done any good anyway give the high spread between Federal fund rates (5%) and broker loans (up to 12%).	The Fed has long fed the market favorable rates to boost the economy without driving up inflation.  Following the busts of this decade, it has been afraid of raising rates to puncture renewed bubbles because of concerns about impacts on the broader economy.
The government's post-crash responses were slow and limited.  Hoover cut taxes, but there wasn’t much to cut.  He held meetings to make things look under control.  The New Deal spent some money employing people and promoted business.  Later in the decade, interest rates were re-raised and efforts were made to balance the budget.  The economy dropped again.	The Fed and the Treasury have taken extraordinary steps to limit bankruptcies of companies deemed too big to fail and to promote liquidity through sharp interest rate cuts and other means.  The government has cut some taxes and provided some fiscal stimulus.  These steps are against a background of a stronger safety net than existed in the 1920s-1930s, including unemployment insurance, social security, Medicare, Medicaid, and more substantial government spending on defense and many other things.
The NYTimes Index rose from 106 in May 1924 to 452 in September 1929, then down to 224 by November 13, 1929 and, after a rally in early 1930, down relentlessly to 58 on July 8, 1932.	The stock markets in the U.S. and the world actually dropped at a steeper rate in this go around than in 1929, though their recovery has looked better so far.
The consequences of the collapse spread rapidly through the banks, real-estate, and industry.  Banks closed, mortgages were foreclosed, many companies went bust, and unemployment soared.  Without willing lenders to willing borrowers and without willing buyers of goods and services, the economy froze up.  Despite a temporary lift in the mid-30s, the Great Depression lasted over a decade.	So far, 123 banks have been closed this year;  a number of major players would have collapsed but for government relief; real estate values have dropped sharply and mortgages have been foreclosed; liquidity has dried up as banks have been unwilling to lend;  lenders and investors have been unsure of the value of many of their or their customers' assets; and unemployment has gone over 10%.  Although a new great depression has seemingly been avoided, the commercial real estate market is on the edge of a collapse as loans are coming up for renewal and values have dropped sharply.

 

Government Responses to Economic Collapse

An interesting piece from Paul Krugman's blog  [ http://krugman.blogs.nytimes.com/ ]

Depression multipliers  

Barry Eichengreen and Kevin O’Rourke have lately been scoring a series of research coups, based on the combination of historical perspective and a global view. Most famously, they showed that on a global basis the first year of the current crisis was every bit as severe as the first year of the Great Depression.

Now they and collaborators have a new piece on policy effects, especially fiscal multipliers.

The background here is that there are two problems with estimating multipliers relevant to our current situation. First, you need to look at what happens under liquidity-trap conditions — and except in Japan,these haven’t prevailed anywhere since the 1930s. The second is that in the United States, fiscal policy was never forceful enough to provide a useful natural experiment. We didn’t have a really big fiscal expansion until World War II; and WWII isn’t a good experiment because the surge in defense spending was accompanied by government policies that suppressed private demand, such as rationing and restrictions on investment.*

What E&R do here is use a broad international cross-section to overcome this problem. This works because a number of countries had major military buildups during the 1930s — fiscal expansions that can be regarded as exogenous to the economic situation, since they were driven above all by Hitler’’s rearmament programmes and other nations’’ efforts to match the Nazis in this sphere, and by one-off events like Italy’’s war in Abyssinia.

What do E&R find? Initial fiscal multipliers of 2 or more, although they shrink over time. Yes, fiscal expansion is expansionary.

* I really, really don’t understand why this point has been so hard to get across.  [This is Krugman's footnote.]

Creating the Corporate Soul or something

Roland Marchand’s Creating the Corporate Soul offers a detailed and well-illustrated account of American corporations’ public relations and advertising campaigns to “humanize” large corporations, shape public opinion to their advantage, and sell their wares.  These public relations and advertising campaigns began in the late 19^th Century and continue to the present. 

While selling products was part of the pitch, he argues, the main objectives of these campaigns were often political:  to persuade the public of these companies’ essential goodness and trustworthiness in order to gain some advantage in political debates over regulation, subsidies, resisting unions, etc.  Thus for example, Republic Steel spent lots of money touting itself and the “free enterprise system.” Since few readers of the publications were ever likely to buy steel in commercial quantities (or in any other quantity) from Republic Steel, it is apparent that the purpose of the ads was not to sell I-beams or rolls of steel, but to promote a political climate favorable to its economic interests. 

Similarly, AT&T spent gobs of money promoting its image as a wonderful, helpful corporate-citizen whose services wondrously knit families and friends together; whose dividends kept the wolf from widows’ doors; and whose goodness justified strengthening AT&T’s monopoly grip on long-distance phone services.  While selling phone services was not irrelevant, the threats posed by competitors, regulators and possible public-takeovers of phone systems made the political objectives of this long-term advertising campaign of paramount importance. 

It is somewhat sad to note how easy it apparently is to persuade people with suggestions and associations that have no rational connection to the real issues.  Showing pictures of children, soldiers, beautiful women or grandparents seems to be enough to persuade people that huge steel, auto and phone companies are really “jes folks” whom we should love and follow—or maybe that we’ll get a wonderful handsome/beautiful partner if we just buy the product.  Likewise, images and concerned voices can push strongly negative messages, scaring people into believing or at least fearing that their lives are endangered by failing to consume a product or by government action that would cut into the advertising customer’s profits. 

Imagery yes! Substance no!  Gaaargh. 

The gullibility of people for such manipulative imagery is scary, particularly when it goes from selling widgets to shaping public policy.  It is also disturbing that corporations have such huge budgets for such advertising, potentially overwhelming attempts to address issues on their merits. Television only makes the dangers worse, both because of the greater impact of TV’s sound and visuals and because of the financial barriers to equal time for the different sides of the argument.   

Sadly, such advertising continues today and will help shape the outcomes of debates over such vital issues as health care and global warming.  30-second images and soundbites will decide our children’s futures.  To quote Ross Perot:  “Is this a great country or what?”

Selling, Advertising & Salesmen: Enough

Selling and salesmen obviously play an important role in our capitalist economy.  Thank heavens it’s no longer door-to-door and we have no-call lists.  The dreaded arrival of the evangelist and phone calls from fundraisers are bad enough.  Advertising on TV, radio and the internet can be mostly ignored, as can print advertising.  Still, whether selling is done by in-your-face salesmen or annoying advertisements, at what point do the negatives outweigh the benefits of aggressive selling?  Can one get the benefits without the negatives? 

 

At a general level, salesmen, advertising and selling can (a) inform potential buyers of new, non-commoditized products (e.g., sewing machines), (b) match interested buyers to the manufacturer through a consummated sale, and (c) sometimes facilitate the sale, as with credit or delivery terms.  This is good for commerce and can be valuable for both manufacturers and buyers.  Direct marketing was probably particularly valuable to rural and small town buyers, especially in the days before automobiles and shopping centers.   Sellers of unfamiliar technology, such as harvesters, early autos and sewing machines could also provide a valuable educational function. Without such selling campaigns, much of what passed for an industrial revolution in the U.S. might not have occurred.

 

On the other hand, salesmen, advertising and selling can (a) pressure people into buying things they do not want or need (e.g., to get rid of the salesman), (b) promote sales through misinformation  about the relevant product and competitors, (c) encourage unhealthy debt, and (d) potentially sell dangerous products, such as patent medicines.   Disadvantages and direct/indirect harms of the products or their manufacturing are never disclosed as part of the sales pitch.  (Though there is fine print to “talk to your doctor” in connection with some prescription pharmaceutical products.) 

 

In addition to the individualized impacts noted, there is the problem of a runaway “consumer society” that has gone deeper and deeper in debt to the point that the nation’s overall economic health is threatened.    The externalities of mass production – ranging from ecological destruction, poisoning of the rivers and the water we drink, and global warming, for example – are real, but unmentioned consequences of mass selling.   And, those externalities are accumulating and getting worse with severe adverse consequences looming for our lives and the lives of the rest of humanity, including our children.

 

Really, try a thought experiment:   how much of the stuff in Tysons Corner does anyone really need?  Walk the aisles and ask that question.  Here’s another question: how many upgrades of computers, cellphones, televisions, or automobiles have most of us actually needed (or materially benefited from) in the past 20 years.   If not for the attempt to embarrass people into thinking they might be unfashionable or behind-the-times, how much of that stuff would anyone even think to want?   We’ve created consumers of stuff from all over the world and now owe most of the world more money than we can imagine.  Paying taxes to balance budgets is trashed as an unfair interference with people’s right to buy more stuff at Tysons (or Gucci).

 

The process of creating demand can obviously boost the economy in the sense of increasing the number of transactions, the manufacturing, and the stuff we can consume.  But, at some point, that rationalization fails.   While historical comparisons fail, reported modern attempts to measure people’s “happiness” across income levels and cultures do not find that more is necessarily better.   It often isn’t.

 

So, my modest (provisional) suggestion would be to mandate a reduction of selling and advertising.  This might be done by outright limits on selling and advertising (by media or by product) or by limiting such selling to words – preferably printed words in order to encourage literacy.  This would permit the dissemination of information, but would limit the indirect messages through imagery and association.   An additional thought would be to require explicit, graphic disclosure of the unpriced externalities that result from production, distribution and disposal of the products, after first doing as much as possible to require that all such externalities be priced into the product.  Such information is important but rarely disclosed.

Race and Currency / Metaphors and Their Meaning

I always have difficulty with articles that deal with metaphors and analogies as history.  The idea is defensible since metaphors and analogies reflect modes of thinking and persuasion and thus may provide insights into important cultural and political constructs or movements of earlier periods.  On the other hand, metaphors and analogies are inherently indirect descriptions of realities and attitudes.  Building ones’ analysis on metaphors and analogies risks a structure that is too tall or heavy for the soft ground on which it rests.

Here, for example, the connection between race and money is built on parallels of language used to evoke images of essential superiority (white skin, gold-based money) and inherent inferiority (black skin, untethered money supplies), of strength and infirmity, of soundness and debasement.  At some levels (beyond mere linguistic history), the historical arguments work in the sense that there may have been people whose distaste for one form of debasement may have been reinforced by the commonality of language used for the two alleged debasement.  For example, today, one can see advocates, such as Fox “News” personalities, evoking images of Hitler, death camps, communism, etc. to attack Democratic health care proposals, which have nothing to do with Hitler, death camps, communism, etc.  The Right Wing’s use of such imagery suggests that there must be emotionally persuasive force (at least to those who want to be persuaded) to stretching metaphors to reach new, unrelated circumstances.  Ho w advocates use and misuse imagery is an interesting subject in its own right.

Unfortunately, it isn’t clear to what extent the use of common or parallel language and imagery reflects (a) our collective dearth of imagination—we recycle favorite phrases (“tar with the same brush” you might say) because we aren’t clever enough to invent new ones—or (b) an effective tactic of persuasion based on an emotional resonance (especially for those not inclined to think issues through rationally) or (c) people’s actually equating two very different issues as being essentially similar.  In other words, are we looking at histories of argumentation or something  deeper?  The articles this week seem to favor Option (c), whereas I am inclined toward Options (a) and (b). 

Part of my reason for inferring that the articles are mostly dealing with issues of argumentation is that there were serious mismatches in people’s concerns about the issues.  Prof. O’Malley acknowledges, for example, that some individuals who favored the gold standard for currency also favored the rights of African Americans.  Similarly, Southern Populist farmers could plead for loose currency standards even as they (and many of their leaders) could be viciously racist—possessing absolute certainty about their own essential white superiority but having equal confidence in the glories of a loose money supply.  This suggests to me that the links between race and currency are weaker than the authors suggest.   

Political advocates always tend to describe their positions as solidly built on firm ground of history, morality, economics, religion, etc., while their opponents are described as shifty, unreliable, dishonorable, and harmful.  That they use the same comparisons for two arguments may simply reflect the flexibility of metaphors and analogies, as well as the advocates’ lack of imagination (or perhaps the advocates’ sense of their audiences’s lack of imagination) for new metaphors, not some deeper connection between the two substantive issues.   That many well-to-do Southerners hated both loose currency and other races is no more surprising than that many Southern farmers hated both the gold standard and other races.  I’m not sure how a review of popular metaphors and analogies helps us understand either substantive issue or their linkage, if any.

The Menace of the Public Option

The Menace of the Public Option
San francisco Chronicle
 M.C. Blakeman
 Saturday, September 19, 2009

Of all the current assaults on our noble republic, perhaps none is more dangerous than the public option - specifically, the public library option.

For far too long, this menace has undermined the very foundations of our economy. While companies like Amazon and Barnes & Noble struggle valiantly each day to sell books, these communistic cabals known as  libraries undercut the hard work of good corporate citizens by letting people read their books for free. How is the private sector supposed to compete with free? And just what does this public option give us? People can spend hours and hours in these dens of socialism
without having to buy so much as a cappuccino. Furthermore, not only can anyone read books for free in the library, they can take them home, too. They get a simple card that can be used at any library in
town. No checking on the previous condition of books they've read.

No literacy test. Nothing. Yet, do these libertines of literature let you choose any book you want, anytime you want it? No. Have you ever tried to get the latest best-seller at a public library? They
put you on a waiting list for that, my friend. And if you do ask these government apparatchiks a question about a book, they start talking your ear off, and pretty soon they're telling you what to read.

Of course, if you break one of their petty rules and return a book  late, you have to pay fines that mount grotesquely each day. Even if you die, your overdue fees keep piling up. Is that not a death tax?
 How long must the elderly live in fear of burdening their children with these unfair sanctions on their estates?

Don't be fooled for a minute. Somebody has to pay for these "free"  liibraries, and I'll tell you who it is, pal. Those good ol' suckers, the American taxpayers, that's who.

Have you ever wondered who's really behind this public library option? And don't you think it's fishy that they mask their nefarious  activities with benign-sounding names, like Friends of the  Library? What's their real agenda - and why do they have so many "volunteer" meetings, anyway?

No, my fellow Americans. We cannot wait until we're all goose stepped into a massive book checkout line. This assault on capitalism and our very way of life has got to end. Be. subversive ... burn your library card! Go out and buy a book!

  M.C. Blakeman is the co-author of "Safe Homes, Safe Neighborhoods" (Nolo Press).

More on Freshwater v. Saltwater Economics Debate

Two items of interest are noted and quoted here.

First is an article by Robert Shiller who decries the failure of current economic models to address bubbles.  Second is a blog posting by Brad DeLong of UC Berkley provides more in the running disputes between saltwater and freshwater economists.  Paul Krugman is not the only one involved in this debate.

From Robert Shiller:  Economists need to study bubbles, reinvent models

http://www.taipeitimes.com/News/editorials/archives/2009/09/22/2003454141

By Robert Shiller

Tuesday, Sep 22, 2009, Page 9

The widespread failure of economists to forecast the financial crisis that erupted last year has much to do with faulty models. This lack of sound models meant that economic policymakers and central bankers received no warning of what was to come.

As George Akerlof and I argue in our recent book Animal Spirits, the current financial crisis was driven by speculative bubbles in the housing market, the stock market, energy and other commodities markets. Bubbles are caused by feedback loops: rising speculative prices encourage optimism, which encourages more buying and hence further speculative price increases — until the crash comes.

You won’t find the word “bubble,” however, in most economics treatises or textbooks. Likewise, a search of working papers produced by central banks and economics departments in recent years yields few instances of “bubbles” even being mentioned. Indeed, the idea that bubbles exist has become so disreputable in much of the economics and finance profession that bringing them up in an economics seminar is like bringing up astrology to a group of astronomers. 

THE REST OF THE ARTICLE CAN BE FOUND AT THE LINK ABOVE.

For Brad DeLong:

http://delong.typepad.com/sdj/2009/09/a-magnificent-seven.html

Shichinin no Economusutai--NOT!!

David K. Levine of Washington University in St. Louis:

"It is a daunting task to bring you [Paul Krugman] up to date on the developments in economics in the last quarter century. I know that John Cochrane has tried to educate you about what we've learned about fiscal stimulae [sic][1] in that period..." and "But the stimulus plan? How can you be arguing for more? Since we are recovering before most of the stimulus money has entered the economy--isn't that evidence it isn't needed? How can you write as if you are proven right in supporting it?"

John Cochrane of the University of Chicago:

"[That spending can spur the economy] is not part of what anybody has taught graduate students since the 1960s. They are fairy tales that have been proved false. It is very comforting in times of stress to go back to the fairy tales we heard as children but it doesn’t make them less false..." and "Paul [Krugman's]’s Keynesian economics requires that people make logically inconsistent plans to consume more, invest more, and pay more taxes with the same income..."

Robert Lucas of the University of Chicago:

"Christina Romer--here's what I think happened. It's her first day on the job and somebody says, you've got to come up with a solution to this--in defense of this fiscal stimulus, which no one told her what it was going to be, and have it by Monday morning.... [I]t's a very naked rationalization for policies that were already, you know, decided on for other reasons..." and "If we do build the bridge by taking tax money away from somebody else, and using that to pay the bridge builder--the guys who work on the bridge -- then it's just a wash... there's nothing to apply a multiplier to. (Laughs.) You apply a multiplier to the bridge builders, then you've got to apply the same multiplier with a minus sign to the people you taxed to build the bridge. And then taxing them later isn't going to help, we know that..."

Edward Prescott of Arizona State University:

"I don't know why Obama said all economists agree on [the need for a stimulus bill]. They don't. If you go down to the third-tier schools, yes, but they're not the people advancing the science..." and "the period of the '20s was one of healthy growth, until Hoover's anti-market, anti-globalization, anti-immigration, pro- cartelization policies were instituted, brought this expansion to an end, and created a great depression..."

Eugene Fama of the University of Chicago:

"Sorry, but I’m not familiar with [Hyman] Minsky’s work" and "Haven't seen it [Paul Krugman's article]. I pay no attention to him..." and "Government bailouts and stimulus plans seem attractive when there are idle resources - unemployment. Unfortunately, bailouts and stimulus plans are not a cure. The problem is simple: bailouts and stimulus plans are funded by issuing more government debt. (The money must come from somewhere!) The added debt absorbs savings that would otherwise go to private investment. In the end, despite the existence of idle resources, bailouts and stimulus plans do not add to current resources in use. They just move resources from one use to another..."

Luigi Zingales of the University of Chicago:

"Keynesianism has conquered the hearts and minds of politicians and ordinary people alike because it provides a theoretical justification for irresponsible behaviour. Medical science has established that one or two glasses of wine per day are good for your long-term health, but no doctor would recommend a recovering alcoholic to follow this prescription. Unfortunately, Keynesian economists do exactly this. They tell politicians, who are addicted to spending our money, that government expenditures are good. And they tell consumers, who are affected by severe spending problems, that consuming is good, while saving is bad. In medicine, such behaviour would get you expelled from the medical profession; in economics, it gives you a job in Washington..." and "Among the 37 Economics Nobel prize winners in the last 20 years, four received the prize for their contributions to macroeconomics. None of these could be considered Keynesian. In fact, it is hard to find academic papers supporting the idea of a fiscal stimulus..."

Michele Boldrin of Washington University in St. Louis:

"It is a fantasy that the economic profession at large finds the "stimulus" and the "bank bailout" plans sensible and adequate. Most economists we know oppose them.... Outside the administration, the convinced supporters of the plans are a small minority among academic economists working in those fields. Both plans contradict four decades of research and are designed to please special interest groups..." and "Is there a case for borrowing now to finance a stimulus package? People are worried about the future and are sensibly reducing their spending. Does this imply the government should step in and do the spending for them? Put that way, the idea seems like a non-starter..."

In case there is any doubt:

1. Paul Krugman is reasonably up-to-date on research in macroeconomics over the past quarter century (Levine);
2. that spending can spur the economy is part of what everyone who teaches their graduate students about the dot-com boom of the 1990s or about the housing-led expansion of the 2000s says, and the government's spending is as good as anyone else's as far as this is concerned (Cochrane);
3. Christina Romer played a significant role in the design of the ARRA (Lucas);
4. there is certainly debate over whether "advancing the science" means what Ed Prescott thinks it means (Prescott);
5. Eugene Fama really ought to have paid a little attention to Minsky-Kindleberger at some point in his career (and really ought to be paying attention to Krugman now) (Fama);
6. Luigi Zingales needs really, really badly to read John Maynard Keynes's "How to Pay for the War" before he embarrasses himself further (Zingales); and
7. I don't think "working in those fields means what Michele Boldrin thinks that it means (Boldrin).

And in case there is any doubt:

1. the fact that macroeconomic market failures are no longer getting rapidly worse is not a reason for immediately abandoning all of the policies to deal with thsoe failures (Levine);
2. there is nothing logically inconsistent with models in which aggregate planned expenditure is different from income, and indeed Milton Friedman's, Knut Wicksell's, and David Hume's economic models are all of this type (Cochrane);
3. even full Ricardian equivalence does not keep changes in government purchases from affecting total spending (unless government purchases are perfect substitutes for private consumption) (Lucas);
4. Herbert Hoover was on the right wing of the American political spectrum and tried as best he could to follow pro-market, pro-globalization, pro-competition economic policies (Prescott);
5. the savings-investment identity is an equilibrium condition, not a behavioral relationship. Thus it says nothing about how and whether changes in one form of spending will or will not call forth changes in the flow of spending as a whole (Fama);
6. it is in fact rather easy to find academic papers supporting the idea of fiscal stimulus under appropriate conditions, if you look (Zingales); and
7. when the prices of private bonds collapse and the prices of government bonds soar, that is a very powerful market signal that private businesses should borrow (and spend) less and the government should borrow (and spend) more (Boldrin).

The scary thing is not that Levine, Cochrane, Lucas, Prescott, Fama, Zingales, and Boldrin are wrong--people are wrong all the time. The scary thing is the level at which they are wrong: these are all freshman (ok, sophomore) mistakes--yet the seven include two past (and a year ago I would have said three future Nobel laureates in Economics).

If this doesn't frighten you, you aren't paying attention...

NYT Editorial - The Rights of Corporations

From the New York Times' editorial page on September 21, 2009 comes an interesting editorial on a pending case at the U.S. Supreme Court.  It comments on a new danger from the conservative activists on the Court who threaten to overturn a century or more of precedents on the limited legal rights of corporations and the power of Congress to limit political contributions by corporations.  Not even the plaintiffs in the case thought this was the issue they were raising.  As if corporations don't have enough power already....

Here's the editorial quoted in its entirety:

The Rights of Corporations

The question at the heart of one of the biggest Supreme Court cases this year is simple: What constitutional rights should corporations have? To us, as well as many legal scholars, former justices and, indeed, drafters of the Constitution, the answer is that their rights should be quite limited — far less than those of people.

This Supreme Court, the John Roberts court, seems to be having trouble with that. It has been on a campaign to increase corporations’ legal rights — based on the conviction of some conservative justices that businesses are, at least legally, not much different than people.

Now the court is considering what should be a fairly narrow campaign finance case, involving whether Citizens United, a nonprofit corporation, had the right to air a slashing movie about Hillary Rodham Clinton during the Democratic primary season. There is a real danger that the case will expand corporations’ rights in ways that would undermine the election system.

The legal doctrine underlying this debate is known as “corporate personhood.”

The courts have long treated corporations as persons in limited ways for some legal purposes. They may own property and have limited rights to free speech. They can sue and be sued. They have the right to enter into contracts and advertise their products. But corporations cannot and should not be allowed to vote, run for office or bear arms. Since 1907, Congress has banned them from contributing to federal political campaigns — a ban the Supreme Court has repeatedly upheld.

In an exchange this month with Chief Justice Roberts, the solicitor general, Elena Kagan, argued against expanding that narrowly defined personhood. “Few of us are only our economic interests,” she said. “We have beliefs. We have convictions.” Corporations, “engage the political process in an entirely different way, and this is what makes them so much more damaging,” she said.

Chief Justice Roberts disagreed: “A large corporation, just like an individual, has many diverse interests.” Justice Antonin Scalia said most corporations are “indistinguishable from the individual who owns them.”

The Constitution mentions the rights of the people frequently but does not cite corporations. Indeed, many of the founders were skeptical of corporate influence.

John Marshall, the nation’s greatest chief justice, saw a corporation as “an artificial being, invisible, intangible,” he wrote in 1819. “Being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly, or as incidental to its very existence.”

That does not mean that corporations should have no rights. It is in society’s interest that they are allowed to speak about their products and policies and that they are able to go to court when another company steals their patents. It makes sense that they can be sued, as a person would be, when they pollute or violate labor laws.

The law also gives corporations special legal status: limited liability, special rules for the accumulation of assets and the ability to live forever. These rules put corporations in a privileged position in producing profits and aggregating wealth. Their influence would be overwhelming with the full array of rights that people have.

One of the main areas where corporations’ rights have long been limited is politics. Polls suggest that Americans are worried about the influence that corporations already have with elected officials. The drive to give corporations more rights is coming from the court’s conservative bloc — a curious position given their often-proclaimed devotion to the text of the Constitution.

The founders of this nation knew just what they were doing when they drew a line between legally created economic entities and living, breathing human beings. The court should stick to that line.