Blogging Fusion

The Death of a Blog

As you can see, there have been no posts in three months. I feel a sending off is fitting for this blog: I spent quite a lot of time on things below—life just happened to get in the way sometime in October and I never got back on the blogging horse. 

I hope to start a lifeblog sometime in the near future as a way of aggregating the various threads of my life. Thanks for reading: it's been fun.

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Woefully Few Posts

Readers,

As you can see, I haven't posted in quite awhile. I've been extremely busy with a variety of things, and I hope I can get back on the blogging wagon soon, time permitting. Because I much prefer original content to reblogging, posting is quite time-consuming, and I haven't been able to fit it in lately. It's as simple as that. Hope to be back soon.

George

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Can You Believe This Change?

Newt Gingrich's comments last spring about the 2012 presidential election being the most important since 1860 (when Lincoln was elected) are exaggerated, but there's a grain of truth to the statement: the upcoming election poses tougher questions than recent elections. In broad terms, are we going to have a president proposing aggressive fiscal policy or deep cuts? Are we going to destroy environmental regulation and pray that jobs will be created? How about further watered-down interpretations of Dodd-Frank or the health care act?

The policy differences between Republican candidates and President Obama are glaring, more so than in other recent election cycles. A "strong difference" from the 2004 campaign—Kerry's proposal to create a national insurance pool for people suffering from catastrophic illnesses—pales in comparison to incessant promises to repeal Obamacare.

We can safely say that the country would be swung sizably to the right by the election of a Republican president, even though the Bush-to-Obama transition has been far more muted than predicted. I doubt that many of Perry or Romney's off-the-wall policy proposals would be enacted, but the executive's power lies largely in the ability to enforce laws, whether they be banking regulation, health care, etc. A Republican president could selectively enforce certain regulations, grant waivers to states, and so forth.

Examples of the changes that Republicans are proposing were on display at the debate two nights ago. Here's a screencap of FoxNews.com just after on Friday morning:

Let's run through the policy changes that the panoply of sub-headlines indicates:

• Herman Cain wants to eliminate the EPA
• Rick Perry is backtracking from questioning the legality of Social Security by proposing what sounds to me like a plan to cut benefits for younger people
• Rick Santorum wants to repeal the repeal of Don't Ask Don't Tell (he was asked the question by an openly gay soldier)
• Michelle Bachmann wants to build a fence on the border with Mexico
• Mitt Romney also offers what looks like a plan to cut benefits for the young (he says no new revenue)
• Herman Cain's "economic secret kitchen cabinet" is a plan to reduce personal and corporate taxes to 9% and have a 9% sales tax 

These would have been radical proposals ten years ago, and they demonstrate a nightmarish view of America. Do we want to wall our country off, encourage pollution, reduce benefits for the young, reinstate anti-gay policies, and radically reduce taxes (and therefore government spending)?

It appears to me that these policies are regressive in the most literal sense of the word. They would turn back the clock to the "good-old-days" of xenophobia, homophobia, weak(er) social benefits, and sparse protection from pollution. We have to remember that bad conditions (like a river catching fire) encourage people to demand changes, not some abstract need to hurt businesses.

To add insult to injury on the policy proposal front, here's another headline run during the day on Friday:

Because if there's one legitimate question posed by the incredible economic turmoil over the last week, it's "Do We Really Need a Department of Education"? I don't want to devolve into snarkiness, but it's hard not to, espeically considering:

1. The Republicans have spent the last two years talking about fiscal discipline, and generally claiming that they "really understand economics"
2. The global economy is very weak, Europe is on the verge of a debt crisis, China's growth engine is slowing
3. You'd expect people from the "party of economics" to spend debates offering concrete plans to solve current economic issues

Instead, we have presidential debates talking about getting rid of the EPA and the DoE, along with conservative lawmakers in the House demanding immediate spending offsets for disaster relief programs. This means affected Americans (like those in my hometown who found their houses underwater due to Hurricane Irene) may not see timely aid.

I personally find this so frustrating because there is a real place in our political discourse for a fiscally conservative party (and the Republicans ain't it). The potential of spending too much is very real (it's happened often over the last thirty years, but mostly under "conservatives"). Unfortunately, phrases like "fiscal discipline" and "responsible government" have taken on what Noam Chomsky calls a "doctrinal meaning," whereby the use of such phrases in political discourse is divorced from their literal meaning.

Strictly speaking, "fiscal discipline" would mean making sure that over a reasonable window (10 years, say) crucial policies were funded while spending wasn't out of line with revenue. Where spending was exorbitant, reductions would come in the least harmful way possible; where revenue was low, it would be raised in the least painful way possible. Policy discussions would concern which policies were most important and which methods least harmful. Unfortunately, this doesn't look like our political discourse.

Although simple, this clearly illustrates that the "fiscal discipline" of Republicans, where revenue never rises and spending always falls (except for the military), has special meaning apart from what the words alone indicate. These doctrinal definitions are common on both sides of the aisle, but I think "fiscal discpline" is a strong example. Plainly speaking, this means that the gap between economic proposals and economic reality is widening. Hence why middle-of-the-road Obama and Perry/Romney would make such different presidents (in policy terms). Even if Romney/Perry don't believe their own more outlandish proposals, they're going to keep the flame of "fiscal discipline" going. I find this dangerous, smart fiscal policy is not something that one party has reign over—it's the product of many factors and goes to the heart of national priorities.

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Surprise: Few actual economists featured on-air

Just after my last post lamenting that we assume people can't understand things, I came across this story from Media Matters, detailing the incredible lack of economists on cable news. From the article:

[Failing to explain that cutting government spending leads to weaker growth]  apparently had consequences. An August Reuters/Ipsos poll found that 49 percent of respondents supported cutting government spending as a means to stimulate the economy -- far more than those who supported actual stimulative policies like extending unemployment benefits and extending the payroll tax cut.

On the rare occasions when the media gave credible economists a voice in the debate, the public heard a very different analysis. Asked about the effects of spending cuts on the U.S. economy, PIMCO CEO Mohamed El-Erian (who holds a Ph. D. in economics) said on the July 31 broadcast of ABC's This Week, "We have a very weak economy, so withdrawing more spending at this stage will make it even weaker." Two days later on CNN, El-Erian provided a grim assessment of the final debt deal: "We're worse off in terms of economic outlook. Growth will be lower. Unemployment will be higher. And ironically, we're worse off in terms of medium term fiscal solvency because we haven't done much to the debt but we're undermining our ability to grow out of the debt."

Again, there are plenty of difficult issues in economics, but many concepts are easily explainable. It's pretty easy to explain the idea that government spending is part of GDP and that at times this spending has practical usefulness. We can easily illustrate the elements of concepts with examples: if there is no road funding, a construction worker loses his/her job; no school funding, and a teacher loses his/hers. 

From this report, the problem is obvious: there aren't many economists on-air.

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Keynes on Keynes: Politics and Effective Demand

John Maynard Keynes is both exalted and maligned these days. I recently started reading The General Theory and I wanted to reproduce a few interesting snippets here. But first, I want to make a radical statement: reading what people actucally wrote is useful. When figures get politicized (and polemicized), opposing orthodoxies form which limit dicussion. This has happened with Keyens over the last three years: to Paul Ryan, he's satan; to many on the left, he's a saint. I'm more sympathetic to the latter, but there are no silver bullets for the complex problems we face.

First off, here's Keynes' discussion why Ricardo's assertion that supply creates its own demand was never seriously challeneged. Under Ricardo's assumption, all someone had to do was make more stuff, hire more people, and corresponding demand would arise from wages paid. This means that the economy would virtually always be at full employment, something Keynes notes doesn't match with reality. He writes:

The completeness of the Ricardian victory is something of a curiosity and a mystery. It must have been due to a complex of suitabilities in the doctrine to the environment into which it was projected. That it reached conclusions quite different from what the ordinary uninstructed person would expect, added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and consistent logical superstructure, gave it beauty. That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority.

This sounds like a comprehensive critique of modern conservative politicized economics, indicating that large sectors haven't advanced their thinking in quite some time. The new "we're adhering to economic law" faction of the Republican party (Paul Ryan, Eric Cantor) make almost exclusively supply-side arguments with the assumption that demand will come.

Certainly, a fair question is: if we hire people and pay them, doesn't this create demand? Keynes would answer: it does, just not enough to fully sustain the new activity without other specific conditions applying.

Here is his (somewhat technical) discussion of the components of demand (don't be scared by the Greek: φ(N) is supply as a function of employment; Z is supply and D is aggregate demand):

(2)  The relationship between the community's income and what it can be expected to spend on consumption, designated by D1, will depend on the psychological characteristic of the community, which we shall call its propensity to consume. That is to say, consumption will depend on the level of aggregate income and, therefore, on the level of employment N, except when there is some change in the propensity to consume.

(3)  The amount of labour N which the entrepreneurs decide to employ depends on the sum (D) of two quantities, namely D1, the amount which the community is expected to spend on consumption, and D2, the amount which it is expected to devote to new investment. D is what we have called above the effective demand.

(4)  Since D1 + D2  =  D  =  φ(N), where φ is the aggregate supply function, and since, as we have seen in (2) above, D1 is a function of N, which we may write χ(N), depending on the propensity to consume, it follows that φ(N) - χ(N)  =  D2.

(5)  Hence the volume of employment in equilibrium depends on (i) the aggregate supply function, φ, (ii) the propensity to consume, χ, and (iii) the volume of investment, D2. This is the essence of the General Theory of Employment.

[...]

(8)  When employment increases, D1 will increase, but not by so much as D; since when our income increases our consumption increases also, but not by so much. The key to our practical problem is to be found in this psychological law. For it follows from this that the greater the volume of employment the greater will be the gap between the aggregate supply price (Z) of the corresponding output and the sum (D1) which the entrepreneurs can expect to get back out of the expenditure of consumers. [...] Thus—except on the special assumptions of the classical theory according to which there is some force in operation which, when employment increases, always causes D2 to increase sufficiently to fill the widening gap between Z and D1—the economic system may find itself in stable equilibrium with N at a level below full employment, namely at the level given by the intersection of the aggregate demand function with the aggregate supply function.

Doesn't sound radical, does it? Basically, total demand has two components: consumption and investment. When people aren't creating demand with the money they don't spend on consumption, we find equilibrium below an optimal equilibrium.

This idea seems reasonable to me under certain conditions (I don't think it's as general as Keynes claimed), but it's certainly possible to reject this theorem using arguments, something not many conservative political leaders have done. In fact, the quite-elegant idea that income is split into two types of demand is almost never raised, let alone refuted. I don't think this is a conservative issue, I think it's an assumption that people are stupid.

After all, it would take about ten minutes to get an economist on CNN and adequately explain this principle that underlies the lion's share of our current political-economic disagreements. I have rarely seen this done, even in print, outside of publications like The Economist or in specific Op-Ed pieces that you have to go digging for.

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Sparse posting, so I've made a list of to-reads

Dearest Readers:

Taking the GREs on Saturday, so sparse posting until then.

In the meantime here are some things to read:

• IRS data for the top 400 income earners, 1992-2008. Note capital gains income.
• Counterparties in general
• Slovenia's government has fallen: danger for the Eurozone? (in short, is Slavoj Zizek happy or sad?)
• A really cool post on the end of low-cost manufacturing in China
• A list detailing our limited political discourse
• The losses in Greece aren't only financial
• And last but not least, an interview with Jean-Claude Trichet

Happy reading.

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