Court reversing precedents to destroy government

Here's a description of the recent Appeals Court decision which invalidated Obama's recess appointments to the National Labor Relations Board.

Appointing government officials during intra-session recess is a practice going back to Andrew Johnson.  Every one of the previous 5 presidents has used this technique, with over 300 appointments having been made this way.

But now, a highly partisan Court of Appeals reverses over 100 years of established practice with the claim that the Constitution did not intend to allow recess appointments within a congressional session. 

Keynesianism and Ricardo

In an amazing essay on "fat tails", British banker Daniel Davies declares Keynesianism proven and the only proven economics:

 I think people are underestimating quite how well-tested Keynesian theory is, by now, in the Popperian sense. It not only works, as shown in dozens of recession cases, it’s also seemingly the only thing that works, also demonstrated by many of the same cases.

Down in the comments section, someone asks if Keynesianism wasn't disproven by the Stagflation of the 1970's.   One other posted seconded that.  Davies only answered that Keynesianism passed that test too.  But sadly no details are given.  So as much as I am inclined to believe this is correct, I can't forward the argument.

Oh wait, here's an introduction to the new Review of Keynesian Economics, a new free online journal.  This is worth following.  In this introduction Palley et al echo what Davies says about stagflation.  While stagflation was indeed used by the opponents of Keynesianism to discredit it, they were wrong.  A good accounting of stagflation is given by Keynesian theories of conflict inflation.

Now at the same time, Davies links to an interesting argument he had on twitter.

I need to read this argument some more.  But my current assessment in that Ricardo's Comparative Advantage argument taken at face value is worse than useless in designing trade policies.  Primarily because it takes so many things as given which are in fact should be variables affected by the model.  The bottom line for me is that comparative advantage is only a fleeting state.  If a country builds up its industrial capabilities through a protectionist regime, that may be best for it's long term advantage, as it may develop a comparative advantage it originally lacked.  Or, through misguided free trade policy, it may loose what comparative advantage it earlier had.  The first of these arguments is well developed by Ha-Joon Chang in his book Bad Samaritans.  The second to my mind immediately follows.  This effect is amplified by free capital flows, another variable not considered by Ricardo.

James K Galbraith also presents a series of problems with Comparative Advantage in his book Predator State.  He concludes with a simple summary: Ricardo was wrong.  I also go with his critiques and summary.  IIRC the core of his primary critique is that Comparative Advantage ignores the developmental effects I mentioned above, notably ignoring changes that can occur as a result of improved division of labor and producer network effects.  I believe there is also an argument that Ricardo's mathematics only works for two trade items.  When you add a third trade item, it fails.

But this is an area where Krugman's old neoclassical side won't entirely let go.  He of course cut his professional teeth on trade (albeit "domestic trade").  Krugman continues to insist that Ricardo was right.  That commentary by Krugman is now fairly old, and he now makes allowances for the liquidity trap now when writing about trade in his blog.  But the problem is not with the qualifications, the very notion of Comparative Advantage itself is fundamentally wrong in many ways.  Comparative advantage is not something you just have, it's something you try to build up and try to hold on to, and those things may require regulation of trade and investment.  Meanwhile, the utility which is maximized through Ricardian Comparative Advantage is not something that people make goals to attain, it's something they are willing to give up to hold onto comparative advantage.

In most other matters, BTW, Krugman is spot on and I read his blog and editorials first thing every day.  Krugman the blogger and editorialist is a great Keynesian.  Krugman the professional economist is (or at least used to be) an equilibrium modeler, and equilibrium modeling is simply apologia for plutocracy.

Posted to Krugman's counterclaim to Stiglitz

I see a problem with Krugman's argument that savings is global.  Since the 1980's those outside the US have been doing our saving for us, for their security and marketing reasons.  Although savings appears low for US citizens, in the global economy as a whole, there is a savings glut, so no surprise that a global depression results.

A second problem is that rich people in the USA may choose to buy assets such as mansions and yachts, and also corporate stocks, another form of asset therefore not savings, which form a large portion of the wealth of wealthy in the USA.  Corporations are themselves international and may have assets and valuable networks in other countries, with their savings, if any, serving more as a defensive buffer.

Dean Baker has emphasized the "wealth effect" that sustained consumer spending even in the presence of falling relative wages and savings.  This argument is seconded by Matais Vernengo at TripleCrisis.


Inequality is different.  If you look at the world as a whole, the average may show decreasing inequality (often not considering local alternatives) and from an invalid averaging effect and tendency to discount or ignore non-monetary losses.  Within each nation or region there is a small group 1% to 0.01% that becomes super wealthy from trading derivatives of capital and labor across countries, but meanwhile their locals may become temporarily richer but ultimately poorer in health, freedom, and access to natural resources such as water and clean air under the crushing weight of the invisible foot of capitalism, ever more unmitigated by the race to the bottom created by free capital mobility and lack of world standards.

Solow dissing neoclassical microfoundations

The great economist Robert Solow disses neoclassical microfoundations in the 2003 speech posted by Mark Thoma.  It is worth reading the speech and the comments.

He points out the very weakness I note, the "representative agent".  Clearly we need at least two types of agents.

Critically reviewing neoclassical economics

Here's an excerpt from a great book of history of economic thought, which also debunks the ideas and methods of neoclassical economics.

Staggering 31 wedges required now

In 2004, Pascala and Socolow determined that 19 wedges (the term they coined for linear increases in CO2 emissions avoidance that ultimately reach 1 Gigaton of CO2 emissions avoided per year) to stabilize the earth's climate at 2 degrees of temperature increase, an imperfect if respectable goal requiring a peak of 500 ppm CO2 and ultimate phaseout of CO2 emissions before the end of the 21st century.

The latest research by Davis et al concludes that as a result of 8 years of mostly delay in starting to build these wedges, 31 wedges are now required.  Their conclusion is that:

Filling this many wedges while sustaining global economic growth would mean deploying tens of terawatts of carbon-free energy in the next few decades. Doing so would entail a fundamental and disruptive overhaul of the global energy system, as the global energy infrastructure is replaced with new infrastructure that provides equivalent amounts of energy but does not emit CO₂. Current technologies and systems cannot provide the amounts of carbon-free energy needed soon enough or affordably enough to achieve this transformation. An integrated and aggressive set of policies and programs is urgently needed to support energy technology innovation across all stages of research, development, demonstration, and commercialization. No matter the number required, wedges can still simplify and quantify the challenge. But the problem was never easy.

An integrated and aggressive set of policies indeed.  Pretty unimaginable from where world politics are now.  And meanwhile, some are claiming that something like the millenium is upon us thanks to unconventional fossil fuel energy.  Looking at and gleefully extrapolating from a recent bump in US oil and gas production from fracking (an environmentally dangerous technique I feel should be outlawed everywhere) conclude that the very notion of peak oil is quaint now, just wait until the world deploys tracking.  It was very depressing to see the new cornicopeans and peakers slug it out in this interesting Oil Drum discussion.  I still believe the peakers ultimately have the unassailable case, but continuing the ramp up of unconventional fossil energy production as we are doing, with the attitude that this is the answer, is very dangerous.  As the saying goes, the higher they fly, the greater the crash.  If there is additional energy available now, and I'd gladly abandon all the new unconventional fossil sources in an instant even to meet this goal, we should be investing all of that energy we possibly can into the construction of renewable energy systems and sustainable electric transport systems.  That is the only way to avoid a huge environmentally forced human population crash before 2200 if not 2100.  Instead, we are investing the harvest of unconventional fossil sources into...more unconventional fossil sources, more useless wars, repression, and costly factory moving, and a fossil fueled denialist and cornicopean politics, all of which are carpeting our path straight over the cliff to the quickest beat.

Aaron Swartz

Nothing I've seen about Aaron Swartz suggests he was suicidal, irrational, or depressed.  He was the epitome of smart rationality and passion about civil liberties.

I imagine him as someone who would have loved to have his day in court.  He might have been in some struggle about the terms of that day in court, but I can't imagine he would not have seen any possible variation as an opportunity for some kind of positive publicity, at least among a large sector of society.

The alleged crime is ludicrously unimportant.  JSTOR is not interested in civil charges, and have even started free public access.  35 years for accessing unclassified scientific publications?

I imagine there are those who might rather not have seen Aaron Swartz have his day in court.

The failure is in the classicism

Posted to Crooked Timber blog on the so-called failure of Macroeconomics:

Keynesian economics was the original macroeconomics, created precisely because classical economics failed to deal with the Great Depression. (And I believe it is profoundly wrong and useless in other ways too.) But then true Keynesian economics, which has deep social democratic implications, got twisted more and more back into the classical tradition, which exists to create continuing rationale for capitalist greed and exploitation, and his little validity otherwise. So it’s certainly no surprise that the purest successors to the Classical tradition missed the Great Recession like their forbears, and my successive twisting explanation may explain many of the New Keynesians. The failure to see a place for fiscal policy is one example. Those who retained more real Keynesian views were more likely to be among those who saw it coming.

But important parts of what Keynes suggested have not been explored, and better approaches to non-equilibrium ways of modeling economics exist. Perhaps if we can’t simply dump the plutocrat shills, we can make the study of macroeconomics more heterdox. Since they’ve been systematically excluded for so long, one need would be for more left economists, including Marxists and marxians.

No Negotiation. Period.

[As I posted to this discussion (which contains a useful link to opinions written by lawyers).]

Unless Obama holds firm to his "will not negotiate over the debt ceiling" pledge, there is no more separation of powers, welcome to the Congressional Dictatorship, where every bill in dispute is tied to a needed debt ceiling increase.  This is not the same as the perfectly constitutional funding requirement for several reasons.  One is that the mere advance threat of using the debt shutdown could roil financial markets, raise interest rates, bring on the debt crisis or another crisis sooner.  Second is that a government shutdown can be ended instantly, restoring confidence in US currency and debt obligations might take a long time.  I don't actually think either of these is at risk now, partly because people like Obama and Bernanke seem trustworthy to most world observers.

I remember being told when visiting DC in the 1990's that the Balanced Budget law could only be a restriction on Congress itself, since it passes the taxes and spending laws--either those are in balance or they are not.  The same logic applies here.  Congress cannot specify a line with three non-collinear points.  Therefore it should be unconstitutional for Congress to apply a Debt Ceiling to the executive that is inconsistent with their spending and taxing laws.  Something has to give.  As has been discussed here, the debt ceiling is likely to be that thing, as the older legislation, and for other reasons.

But if we see the spineless Obama, and a rough deal is cut, including ANY cuts to social insurance, then this is also the end of the republic.  Any visible caving means the tactic worked.

No negotiation, period.  And better if made explicit beforehand, so markets can be spared the drama.  Platinum coinage works for me.  Interfluidity describes a serious version of using platinum coinage: coins in the millions issued as needed only, it's been done before, with the Fed assuring they can neutralize any inflationary impact, all a big nothingburger as he describes it, except to those who thought they could play debt ceiling chicken.

Not every lunch is free

Krugman gets it correct when he said that "Not everything is a free lunch, even now."

Right now, of course, there are enough free lunches sitting there on the ground to build many positive dreams we can imagine, filled with new technology and renewable energy.  But largely for class power reasons, we continue with the nightmare we are actually living--which is unsustainable.

I will retain some doubt regarding the claim that having an independent central bank from which the US government has to borrow, is overall better than the mechanism of having the government simply "print" money, which, contrary to popular belief, our government cannot do by law, with the solitary exception of minting coins, and notably a Platinum coin can be minted in any denomination.

As some commenter says, the fact that our government must always borrow money from the central bank, rather than simply print money, is that interest has to be paid to an uberclass of bankers.  It's a form of class-based monopoly rent, authorized by law.  How did we get here?

Well, it was because bankers wanted the power, of course.  And also because of common misconceptions about money, government spending, debt, and savings.  The people can be fooled easily.  The people can be fooled into believing that inflation, and inflation of any size, even 3%, is too high.  If governments are free to print money, they will gladly inflate their way out of their own debts.  Therefore we must have responsible men, bankers, with a heavy hand on the switch.

The problem with this reasoning is, of course, that Bankers will represent the interests of everyone else.

As it turns out, bankers are mainly interested in maintaining the advantages of two kinds of people, bankers themselves, and savers.  Savers represent bankers themselves, they personally identify with the general interests of savers.  On the other hand, borrowers are marks, and bankers would be inclined to remove all the legal protections their borrowers have in order to fleece them better.  Not that they don't try to fleece their savers also, but they personally identify with the general interests of savers because they are savers.

Inflation of some level is expected and cooked into interest rates (and yes, there can be negative real interest rates when there is a glut of savings and a dearth of conventionally profitable opportunities).  So if bankers and other savers can get even less inflation than what was cooked, they win.  So they are always leaning on that side of the switch, for less inflation than seemed to be coming.

Governments, on the other hand, should be (if they were democratically accountable) more interested in winning by pushing the total production to its maximum, and that means full and continuing employment.  Under the circumstances like we have now, that requires higher inflation levels than we have been seeing recently.  It would be in our interest if inflation was spurred on a bit.  We could get back on trend growth, my guessing is, with considerably less than 10%, sustained for a few years (say, 7% for 5 years).  The best way to achieve that would be by direct government money printing (not borrowing) starting right now, combined with raised taxes on high wealth, speculation, and corporations.  3 trillion dollars of total federal deficit spending each year for 5 years, directed at needed public investments--including education.  If we don't phase down useless military spending and posture, it will take 4 trillion, and 10% inflation.  Not including the tax increases has a similar effect, it means more inflation will be required to do the same job.  Toward the end of this five year period, because of full employment and inflation, government deficits fall off without spending decreases, interest rates rise--with pressure if needed from the Fed, and inflation cools off.  Oh and two more things that made this work before: very active unions and wage/price controls.

I may have this wrong, but go back and following the comparitive government taxing and spending from 1937 until 1963.  Adjust upwards accounting for demographics and increased social spending levels now (as compared with 1937!).  I'm trying to duplicate the post-war boom.  But given a declining resource situation, we address that by not throwing money at now useless wars, but invest wisely in reducing future need for fossil fuels.  If and only if we do that, we can create another "postwar" boom.

Simply letting the Fed QE the way into inflation does less general good.  Instead of the public gaining the fruits of publically funded work, a handful of speculators makes some big profits.  And though in the past this has worked to get the gross product moving up again, such as from 1933-1936, it doesn't really get at the root cause of a depression with large unemployment like we have now, the debt overhang, until it is significantly inflated away.

Less inflation is required, and greater public good is achieved, by just printing money.  In the USA, the debt overhang of the Great Depression was obliterated with relatively little inflation by the enormous federal spending of WWII.  Then, without depressing the economy a bit, the debt the USA itself had occurred was paid off quickly by the prosperous economy created by the government spending, the high tax rates of the era being no impediment.  Now that's the side of the curve to be on!

Let the plantinum coins roll!

Another reason debt ceiling is unconstitutional

Many commentators have noted that the Congress makes laws the determine what money the President must spend, and laws that determine what taxes he must levy.  Those two sets of laws arithmetically determine what the deficit, or amount that the President must borrow, will be.  And the President is under a constitutional requirement to not default on the US debt, which is constantly being redeemed and rolled over into new debt.  Therefore, the Debt Ceiling law is unconstitutional.

Another constitutionality argument is this: it violates the President's veto power.  If the debt ceiling is being reached, as always because of previous laws, if there is also a debt ceiling law, the president may have no choice but to accept whatever law congress drafts, so long as it also raises the debt ceiling, to meet his constitutional requirements.  But to have no choice violates the President's veto power.

Although not setting this up as a constitutional issue, this second idea is what must have inspired Paul Krugman and others to call this a "hostage" crisis.  The very solvency of the US is the hostage.  Congress says, "accept this law, or we'll shoot."

Now many like me fear the President will not hold firm, not pressing these or other constitutional arguments, or use his existing legal authority to mint a trillion dollar coin to monetize the deficit, but instead cave in one or more ways, such as cutting Social Security and Medicare.  Some of those will also say, this is what, as a center-right politician, Obama wanted all along.

Sequester cuts aren't scary

Now that the Sequester (cut to military spending) has been postponed for two months, it's less talked about, but actually a military cut similar to the Sequester (but combined with a new reduced military mission and replacement domestic spending programs) makes a lot of sense.

Ezra Klein reported on this, and showed an amazing graph of real military spending since 1948.

Be sure to click on the above link to see the graph.

The Sequester would not even bring military spending down to the level toward the end of the Clinton Administration, when the economy was creating more jobs than ever, lowest unemployment, and median income rising much more than it has anytime else in recent history.  Some are now saying that the good times then could be attributed partly to a peace dividend.

The rise in real military spending under GW Bush in fact is unparalleled in the entire post WWII history, exceeding even the levels reached during the Korean and Vietnam war eras.  It would take a huge cut now to get us back to average Cold War levels, which are still way beyond what we actually need.

Income from Speculation: Still Untaxed

When all the Bush era tax cuts expired on January 1, they got hurriedly rewritten to restore cuts for those below $400,000 in annual income.  Including the zero-percent rate for income from "long term" (more than one year) capital gains (which is most often income from financial speculation) for individuals whose total income is below $400,000 in total income (or something like that, I'm not a tax expert).

So say you don't work a single day, but cash out stock all year as needed.  So long as your net gain on that stock (over the price originally paid) does not exceed $400,000, you pay no tax (as I understand it now)!  If you had earned $400,000 on wages, you'd be paying a pretty big chunk.  Even if your net stock gain exceeds $400,000, you continue to pay rates about half as high as those for wage income beyond that point, with a continuation of a 15 or 20 percent long term capital gains top rate (I'm not sure which.  BTW Clinton's tax deal of 1997 cut the top capital gains rate from 28 percent to 20 percent.  So Clinton, egged on by Republican Congress, gave the financial income preference a big boost.)

As I have said many times before, the biggest injustices in the tax code revolve around a completely misguided preference for financial income, which is generally speculation and not investment in real stuff.  This tax preference doesn't fuel job creation, it actually fuels disinvestment and job destruction, as we have seen since the Reagan administration, and especially since the GW Bush administration.

[This column is not intended as tax advice and may contain factual errors.]