Nonviolence

A most excellent discussion of nonviolence (and not) at Crooked Timber.

Fear of Inflation is a bad thing (and a little inflation is good for us)

Fear of inflation is a bad thing, especially now, because it is the number one justification used by conservative politicians and conservative economists to justify austerity policies, that is cutting back on government spending in the midst of the greatest economic depression since the 1930's.

Right now, because of economic depression, governments should be increasing spending*, and increasing government deficits as necessary (though tax increases on the wealthy and on financial transactions and carbon would all be good things even now, and would help reduce the deficits resulting from increased spending)  in order to increase employment.  And right now, because of the depressed economic condition know technically as a "liquidity trap," there is no danger of such spending, even in the absense of good tax increases, significantly increasing inflation over what it will otherwise be.  But under other circumstances in the past, this has not always been true, and there are many conservative economic theories and theorists that would predict that increased government spending and deficits recommended by liberal economists would increase inflation even now.  Those conservative theories which falsely predict that government deficits always lead to destructive inflation have actually been proven wrong by recent history, but conservative theorists (as well as many populists) continue to believe in them, and often propagate misleading statistics about inflation in order to support their anti-spending views and tight money theories.  Populists, who often see inflation as simply yet another way the system screws them, often fall prey to believing in those misleading statistics and erroneous conservative economic theories, without seeing the connection between them and the anti-spending policies.

(*In the USA, the federal government did, at least temporarily, increase spending in 2009 in a somewhat failed effort to restore economic prosperity.  It failed, because the spending increase was too small and too short.  And also it failed because while the federal government was increasing spending, state and local governments were hit by shortfalls in tax revenue due to huge decline in the value of real estate and depression in taxable sales and income and were forced to cut back on spending.  Combined government spending at all levels has actually declined.  And this has only made the economic situation even worse.)

It will take me some time me to accumulate the actual numbers, and many may find this hard to believe, but the true story is that there has not actually been much overall inflation overall (on average, across all things people buy, not just things people worry most about like groceries and gasoline which have little connection to government spending) since 2008, by recent historical standards.  And liberal economic theorists argue this is a bad thing.  By liberal economic theories, a modest overall inflation of about 3-4% is actually desireable for maintaining full employment and general prosperity, and lower than average overall inflation (around 2%) since 2008 has contributed to a failure to significantly increase employment.

It might be nice to imagine a world with both full employment and zero (or negative) inflation, but the better you understand liberal economics, the more you realize these goals are incompatible in modern capitalist economies.  A sustained period of negative inflation is actually the key sign of a collapsing economy in which more and more ordinary people are losing their jobs and assets.  That is known as a "deflationary spiral" and it is exactly what was seen in the great depression and it similar to what we are seeing today, even though overall prices are not actually declining overall but merely increasing somewhat more slowly than would be expected based on factors such as resource availability.

Krugman explains IS-LM

Now this is what I've been waiting for.  Krugman giving a concise explanation of IS-LM on his blog.

Krugman admits it's not the complete story but still thinks it's a useful model for understanding certain things, like liquidity traps.

Angelic GDP

In the aforementioned threat on Crooked Timer I've been reading, piglet reveals the fallacy that GDP can keep on growing even if the economy switches more and more to services.

This assertion is very dubious. Services do have a somewhat lower environmental impact but not that much lower once all inputs are properly accounted for (Sangwon Suh, Are Services Better for Climate Change? Environ. Sci. Technol., 2006, 40 (21), 6555-6560• DOI: 10.1021/es0609351). But even assuming we manage to reduce the environmental impact per unit of GDP (which to some extent we are), that won’t be enough to make continued growth sustainable. The 3% or so exponential growth that mainstream economists posit as “necessary” for maintaining our level of prosperity (watch the Red Queen principle here: we “need to grow” just to “maintain prosperity”), equivalent to a doubling time of 20-30 years, will swamp any efficiency increase that can realistically be expected. Daly used the term “angelic GDP” to mock this fallacy: unless we manage to convert economic growth into purely angelic GDP, i. e. economic activity without any physical effects, it won’t be sustainable.

I've been wondering about this sort of thing.  There is a lot of activity that could be considered angelic, but much of it is done for free and could hardly be otherwise.  Case in point: blogging.

Such angelic activity is great in my opinion, but it doesn't pay the bills.  In the future there *should* be more and more such angelic activity, but it should also best (or only) continue to be free, that's a major part of how and can and should continue to work.

The heavenly world is not the one where we pay a negotiated price for each and every little pin, but where more and more, and ultimately everything, becomes free.  But then the bills have to go away too.

A big part of that must be reclaiming the commons for everyone.

In such a world, GDP doesn't merely decrease, it vaporizes.


Some recommended readings on the thread:

Well, the very recent book PROSPERITY WITHOUT GROWTH may be just the thing to read for a quandary like that.

One can always recall John Stuart Mill on the Stationary State.

Or the writings of Herman Daly.

Contradictory Beliefs

How do we reconcile the need for more jobs, and the need for reducing environmental impacts?  Chris Bertram started a great thread on this at Crooked Timber, though many of the commenters seem not quite able to grasp the difficulty of it all.

Here's a great post by Bruce Wilder, though i might change a few things:

The weakness of the Keynesian program is its non-specific, open-endedness. People naturally want to ask, spend on what? and when does the deficit-spending end? (and then what?) These are reasonable questions. There’s a sense, within the abstract insights of Keynes’ analysis, in which it doesn’t matter what the money is spent on, as the objective is reflating the economy’s circular flow to a level of full-employment. But, in actual politics, those details cannot be abstracted away; they must be met.

The tragedy of era is that the answers to the question of what do we focus Keynesian spending on, is not difficult or mysterious. The U.S. economy, and the leading European economies, and the Japanese economy for a long time, are severely handicapped by structural problems and dysfunctional financial systems, and face looming challenges from global warming, peak oil and ecological collapse. Our political systems stand around paralyzed by their devotion to rentier interests, and the Left remains largely silent, barely able to rise above a faint endorsement of neo-liberal pablum.

With all due respect to those gentlemen (seriously), if Reagan Administration veteran Paul Krugman and self-proclaimed Eisenhower Republican Brad DeLong are your idea of “left-leaning”, your “left” is seriously palsied. They are preservationists, at a time, when preservation is simply not a viable option. We cannot preserve our dysfunctional financial system side-by-side with a prosperous economy. We cannot preserve our fossil fuel economy. We cannot preserve the global ecology, without radical change.

U.S. politics is dominated by the rentiers of finance and oil. We need to end that. They are the enemy. Bring them low, make them poor. That will be a good beginning.

I wouldn’t worry too much about “job growth”. The abstraction is confusing, in any case. There’s a lot of work to do, if we are to change the energy basis of the developed world’s economy, and to head off a smoky sojurn thru fossil fuels for the developing world. In the U.S. we need to completely replace the systems for powering transportation and structural heating by 2050. Completely. We need to invest in systems that use considerably less energy as well. We need a rail transporation system that reaches 80% of the population, passengers and goods. That means building a lot of rail, and relocating a lot of residential and business structures.

We might, indeed, seriously consider the welfare-enhancing effects of reducing wasted effort in a Red Queen’s race. More than half of Americans are employed in organizations of more than 100 employees, and most of those are engaged in various forms—not of “production”—but of salesmanship. Maybe, we could tax advertising, and dial down on the salesmanship, without reducing actually needed material consumption much at all. Watch less television. Spend more time on caring for our own, over-programmed children.

None of this is going to happen, as long as the U.S. and, by extension, the world, is ruled by greedy, corrupt, near-sighted oilmen and financiers. The economy and institutional system put in place in the American New Deal and the international order of post-WWII have played out to the endpoint of entropic collapse. It’s over. Gone. Post-post-post. Politically, we need a revolution and a vision for the future.

Sandwichman made another great hit:

 The difference between a recession and a steady state, or even “de-growth”, economy is that one is an accident and the other is a design. It’s the difference between skating and slipping on the ice. When I had a car and depended on it to get to work and shop, my life would be disrupted if the car broke down. I haven’t owned a car for two decades now and my life revolves smoothly around walking, biking and transit [plug: my daughter, Amy Walker’s new book On Bicycles has just been published by New World Library].

I have the very odd opinion that what we need is a spurt of a very specific kind of growthfor maybe a decade or two before easing off into a steady state or low growth scenario. This would be transition-to-a-new-economy growth and couldn’t be accomplished by traditional (Krugman, de Long, et. al.) fiscal stimulus or quantitative monetary easing. Since the late 1970s, the rich countries have been “enjoying” what Stefano Bartolini has termed “Negative Externality Growth,” which means that we’ve been spending more fixing the social and environmental messes we’ve been making and making even more messes in the process.

What we haven’t been doing is promoting the arts, culture and education at anything near the level we could afford to. Education has increasingly been yoked to “marketable job skills” training, whatever that means with narrower and narrower career opportunities for graduates.

The reasons for this huge misallocation are what I see as a deficient understanding of things that are commonly known as “market failure” and its complement “government failure”. In Economics of Welfare (1920), Cecil Pigou identified what have come to be known as “externalities” and argued that the resulting market failures constituted aprima facie case for government intervention. Probably due to a lack of comprehension of Latin among subsequent economists, the Pigovian tradition overlooked the fact that the adjective prima facie may have been meant by Pigou as an equivocation not an intensifier.

Forty years later, Ronald Coase presented a counter-argument that, in the absence of transaction costs and with full assignment of property rights, an efficient allocation of resources would be worked out through negotiation. That is to say “there is no market failure”. Of course, the fine print was in the transaction costs. There’s no such thing as “in the absence of transaction costs.” That’s like saying commodities would be free in the absence of labor costs. Whoop de doo!

Coase’s insight, though, brings to light something more important, though: market failure s all about transaction costs. And the term externality is a misnomer. Transaction costs are the very heart and soul of economic production and exchange.

You can’t escape transaction costs. BUT you can reduce them OR you can increase them. Wait a minute! Why would anyone want to increase transaction costs? The short answer is because that’s where the scope for claiming profit and rent resides. The long answer has to engage the political opportunities for shifting transaction costs, so that they are apportioned as “social costs”.

War, for example, is a tremendously effective way to inflate transaction costs and profit opportunities exponentially while fobbing them off as social and environmental costs.

Is Better Growth the answer to Limits to Growth?

This is one of my core contemplation areas, the possibility of continued growth despite Limits to Growth.  It is possible to have "better" economic growth indefinitely?  Perhaps, depending on how you define "better growth."  Anyway, Chris Bertram kicked off a good discussion by asking a good questions, and describing the political dilemma.

http://crookedtimber.org/2011/09/22/contradictory-beliefs/#comments

The Basic Problem with Capitalism

Brad DeLong noted Nouriel Robini's call of the double dip.

In comments, Graydon made these observations with which I strongly concur:

I think it's much more basic than that. The problem is that capitalism's core goal -- wealth concentration -- is not actually a good idea in terms of general prosperity. Climax forests are great if you're a mature redwood; they're lousy if you're anything else, and almost everyone is something else. (and even the mature redwoods have crowding-out issues among themselves.)

What we're seeing now is analogous to climax forest formation; all of a sudden, a whole bunch of organisms that were getting by OK aren't getting any light anymore, and the whole ecology changes. (From the point of view of the seriously wealthy, they're all still a bit panicked that they're not going to have a chair when the music stops/their tree isn't going to be quite tall enough to avoid being crowded out by the neighbors.)

Doing the obvious and nigh-certain-to-work things aren't morally acceptable to the mature redwoods -- they'd stop towering over all those little organisms -- so they won't. Indeed, they can't, unless they adopt a different moral position. (Or until they stop being, as Duncan Black keeps pointing out, incompetent.)

So the only two really plausible outcomes are a general, protracted -- generationally protracted -- slow collapse of prosperity into plutocracy in at least the developed world, with widespread resumption of defacto debt peonage for the working and professional classes, or a general replacement of the "redwoods" with persons interested in securing the general prosperity.