Thursday, January 29, 2015

Uber-Marx

“We may end up with a future in which a fraction of the work force would do a portfolio of things to generate an income — you could be an Uber driver, an Instacart shopper, an Airbnb host and a Taskrabbit,” Dr. Sundararajan said.

“In communist society, where nobody has one exclusive sphere of activity but each can become accomplished in any branch he wishes, society regulates the general production and thus makes it possible for me to do one thing today and another tomorrow, to hunt in the morning, fish in the afternoon, rear cattle in the evening, criticize after dinner, just as I have a mind, without ever becoming hunter, fisherman, herdsman or critic.”  (The German Ideology)

No Return To Yawning Yet, But Greek Markets Have Bounced

Yeah, the crisis may be over.  Just like that, although probably not fully.  Anyway, the general hysteria of yesterday seems to be way overblown, even if the markets return to declining.  As it is, the Athens stock market rose today, after a sharp fall yesterday.  While the 3-year and 10-year bond yields are higher than yesterday, they shot way up in the middle of the day, but then turned around and fell, more or less mirroring the stock market.  The 3-year peaked at over 19%, but then fell to about 17.5%, about a 1/2 % above yesterday's close.  A similar but less dramatic move happend for the 10-year, ending well below the 3-year at 11.13%.

So, what is up?  Well, I would say that new Finance Minister Varoufakis and PM Tsirpas are following a good game theory strategy.  They have thrown down a maximalist hand publicly upfront, entrenching a lot of outcomes they would like to achieve and dumping all the "bad news" on the markets at one time.  There should not be any further nasty negative shocks coming from the Greek leaders themselves.  It is all out there now: cancelled privatizations, no more public workers laid off (and some rehired), pension increases, minimum wage increases, and so on, not to mention the assertion of their pro-Russian position.  Let me forecast that assuming there are serious negotiations and not just a train heading off the rails, that some of this may get scaled back as a result of them in exchange for a debt haircut (effective, if not official). But that would leave them with much of what they said they wanted, even if it looks like they may have "lost."

It should also be noted that the Greeks may have some support in the negotations from some important players.  In particular, President Hollande of France has made public statements at least somewhat sympathetic to the idea of reducing the Greek debt burden.  This has not received much publicity in the noise coming from German hardliners, but this is not all a one-sided affair.

Regarding the more detailed specifics of the market dynamics, it should be kept in mind that the main immediate threat, indeed really the only immediate threat, has been that of a full-bore bank run in Greece.  There has apparently been quite a lot of running, maybe as much as 1/5 of deposits.  That is a lot, and it accelerated yesterday, and bank stocks took the largest hit of any in the Greek market, some down as much as 40%.  However, there is every reason to believe that the ECB will help them out.  An ELF was established by the ECB to support the Greek banks a week ago Wednesday.  These are reviewed every two weeks, but one is in place, and offhand, given the commitment by the ECB to making the euro work, I see no reason why that will be shut down any time soon.  And I suspect realization of this may well have played at least some role in the markets bouncing today.

Furthermore, although apparently tax revenues are below expectations, Greece has been running a pretty healthy 5% primary surplus.  They really do not need to borrow from anybody (exept for maybe their banks from the ECB) any time soon.  About 80% of their sovereign debt is held by the ECB already, with most of that not up for serious renewal until July.  This looks like a big chicken game between Greece and the troka/Germans, with the latter threatening they do not need Greece in the euro, although they seriously want to keep them in, and Greece making major policy change and demands on the debt restructuing side, while saying they want to stay in the euro, even as many of their supporters say "Go, go, go to Grexit!"  So, there will be tough negotiations, but from where I sit I do  not see anything at all insurmountable about them.

It will probably take a few months of cliff hanging and carrying on, with the markets very likely to do some major see-sawing between now and then, but at some point a muddling through deal may be cut, and the markets can go back to their earlier yawning.

Barkley Rosser

Wednesday, January 28, 2015

More Deficit Hysteria From The Washington Post

Yes, once the CBO changed its forecast of future GDP growth and also thus future federal tax revenues, thanks to their deciding that interest rates will be higher than they had previously forecast (the reason for this change is apparently that GDP has been doing better than expected with a lower unemployment rate resulting, thus presumably leading to the Fed pushing interest rates up higher than was previously expected, several econobloggers (including at least Paul Krugman, Dean Baker, and Angry Bear's Bruce Webb) forecast that various VSP journalist deficit hysterians would go off the cliff yet again in the near future. And, sure enough, the especially hysterical team of VSP deficit hysterians at the WaPo have come through right on time.

In this case, the first out the door is the third and least vocal of their main team, Ruth Marcus, who comments on this less frequently than their supposed economics expert, Robert J. Samuelson, and their ed page editor, Fred Hiatt.  She is even less well informed and educated about econ than RJS at least (there I go again, bringing up credentials), but her effort in today's Post was particularly pathetic.  Dean Baker has already pointed out several simply false statements she makes, as well as several conceptual issues where she simply has no idea what she is talking about.  But, gosh, she certainly is appropriately hysterical, which will please new WaPo owner, Jeff Bezos.   Let me simply add to this commentary by pointing out more atmospheric aspects of her commentary.

First of all, while it is true that Obama did not remind people of this during his SOTU address, which is the takeoff for her column, everybody who has been paying any attention at all has been fully aware that with no other changes in the budget, deficits will indeed start to rise again another couple of years as indeed that tide of retiring baby boomers begins to push spending on benefits for Social Security and Medicare upwards, as long forecast and expected.  So, this is not news.  What is news, or at least a matter of debate, is by how much, with this new forecast of higher interest rates and lower growth from the CBO changing their forecast.  So, how much has this changed?

Well, frankly, not all that much.  What has Ruth Marcus so upset?  Well, while the current debt/GDP ratio is 0.74, the new forecast for what this will be a decade from now in 2025 after this big surge of baby boomer retirements, that ratio will zoom surge explode to 0.79 (!!!!).  Yes, she describes this forecast as being the "ugly picture" (apparently for a figure on the front of the CBO report), yes, "ugly."  Ooooh.  She later notes that when the financial crisis started, the ratio was "(!)43 percent of GDP," not noticing that an increase over a decade from 0.74 to 0.79 does not remotely resemble or match the past increase from 0.43 to 0.74, when this former increase was prior to the coming surge of spending-boosting wave of baby boomer retirements.  Looks not so bad, actually.

For that matter, even as she describes this outcome as "ugly," it is still well below the 0.90 that Reinhart and Rogoff were advertising 4 years ago as being a "cliff"beyond which we would suffer much lower growth.  We now know that R&R were full of it with that claim, but this supposedly ugly outcome will not even be all that close that not really dangerous after all level.

Oh, and at another point in the column, she declares that "the future is not pretty."  Gosh, not only "ugly" but "not pretty."  Gack!  It may well be that the future  is indeed "not pretty," but somehow I doubt that there being 0.79 debt/GDP ratio in 2025 will constitute a major reason for  such a lack of prettiness in our future, much less ugliness.

Not only does Ruth Marcus not know much economics, but I think her sense of  aesthetics is pretty awful as well.

Barkley Rosser

Tuesday, January 27, 2015

Michael Pettis on (Some of) What’s Wrong With Economics

This is in the context of dueling predictions of future Chinese growth, where the bulls are bullish, Pettis says growth has to slow way down because of excess debt accumulation, and then the bulls claim victory because China hasn’t collapsed.  Pettis didn’t say it would but has a theory for why people influenced by economics would think the choice is between robust growth indefinitely and collapse.
....most orthodox economists find it very counterintuitive that the performance of an economy can be systematically affected by the structure of the balance sheet. They tend to think of economic activity as a linear process that tends towards equilibrium, and this path towards equilibrium is perturbed only by external shocks. Equilibrium is assumed to be determined by fundamental factors, and so this is why most economists focus primarily on the fundamentals — i.e. the asset side — and how these fundamentals are managed. External shocks are of course unpredictable, and so they simply incorporate them into their analyses as they occur.
If you think about the economy as a dynamic “system”, however, then it is easier to understand how institutions, including the balance sheet, can create systematic biases and how imbalances evolve and must ultimately reverse themselves. When you read Minsky, for example, he spends a lot of time insisting that the economy is a system, and that it has its own internal dynamic, which is one of the reasons why he said stability is unattainable. It is also why it takes a huge “event” that only Minsky can explain to bring him into the mainstream debate. In ten years he will no longer be part of the debate.
....The framework most orthodox economists have does not permit systematic biases and unsustainable growth. When a finance guy says that the growth in the debt burden is implicit and necessary to maintain growth, and also that it cannot continue, it doesn’t matter how many times I say that I do not expect China to collapse, I don’t think they are able to combine the two statements. They genuinely believe that there is no difference between saying that growth is unsustainable and that China will collapse in a few months. To them, either China is following a stable equilibrium, or it is on the verge of collapse — nothing else is possible in the orthodox framework.

Monday, January 26, 2015

Prospects for Syriza

A day after the Greek elections, and we are all in speculation mode.  Here is what I’m thinking.

Greece faces two short-term financial obstacles, service on its outstanding sovereign debt and backstopping of its financial sector, and the longer-term challenge of rebooting its economy.  Let’s take them one at a time.

Thanks to the extend and pretend policy of the Troika, virtually all the external holdings of Greek sovereign debt are in the ECB.  The point of the fictional bailout program, which had no overlap with reality, was to buy time so that private financial institutions could unload the bad stuff, which they did.  Now the creditors are public.  And they can price these bonds however they want.  The point is that a formal writedown is not required; all that matters is servicing.

Now, in an economic sense, Varoufakis is right when he says that these bonds have already lost value: they can’t possibly generate their official payment stream.  One way or another the creditors have to take a hit.  But the problem is not distributional, it’s political.  Demanding a level of servicing beyond the ability of the Greek state to provide, and then financing these payments through a “bailout” conditional on Greek “reforms” is a shell game, to be sure, but its purpose is to punish the Greek population and impose policies they would never accept through democratic processes.  If you put it this way, the question is not about how the shell game is reconfigured—how large or small the fictitious flow of financing to Greece and then back to its creditors—but the role and content of political conditions.  Syriza’s position seems to be maximalist in this respect: no political conditions.  If they stick to this, there can be no deal unless Germany and its allies do a complete about-face, which is difficult to imagine for domestic political reasons.

But the political terrain is wide and has many dimensions.  For instance, Syriza has proposed an overhaul of the tax system to finally end the impunity of the upper class.  That ought to qualify as a “reform” to any reasonable person, and if moral hazard is your concern, it gets to the heart of it.  Similarly, Syriza claims it wants to release the state from the clutches of the oligarchs, who have managed it as a source of profit for decades.  I don’t know how they will pull this off, but surely this is the sort of reform Greece really needs.  In other words, from the very beginning what was distinctive about the Greek case compared to the other financially strapped peripheral countries was the extent of corruption by the elite.  This is widely known.  If Syriza can package its domestic program as “reform”, and if some portion of it can be acknowledged on those terms by Germany and its allies, there is a basis for a sovereign debt settlement.  Again, the issue has nothing to do with how much money is transferred in a “bailout” or how much of the debt is written off.  The only real question is political.

Second, what about the Greek banking system?  Between their large holdings of sovereign Greek debt and the nonperformance of much of the rest of their books, given the state of the Greek economy, these institutions are presumably bankrupt.  Even though, under eurozone rules, Greece cannot supply its own currency, it remains on the hook as lender of last resort—an intolerable situation.  In a better world, the ECB would assume responsibility for this function, since it is the liquidity creator of first, last and in-between resort.  But that’s not the world we’re in.  So what can Syriza do about this?

There are two sets of parties whose assets are at risk in the Greek financial system, investors (shareholders and creditors) and depositors.  A plan for getting through a domestic financial crisis has to take both into account.

I think the first, if it can be separated from the second, is relatively easy.  Allow existing private institutions to fold and let the investors take the full hit.  But be prepared: take immediate steps to create a public institution that can function as a “good, new bank”.  In the resolution of failed institutions the public entity would acquire still-performing assets, including those deemed to be potentially performing when normal conditions return—the Bagehot test.  Let the rest go down with their respective ships.  Meanwhile, the public entity can hire experienced, talented staff from the banks forced to close their doors.  This is essentially the plan proposed in 2008-2009 for the US and Europe by many economists, such as Willem Buiter, Joseph Stiglitz and, much less prominently, by yours truly.  It confronts moral hazard head on, and it avoids the continuing drag of zombie, or at least balance-sheet impaired, financial institutions.  It is not without risk, but if the public entity is up and running before the private institutions collapse, it should do the job.

The bigger problem, of course, is the depositors.  Again, this would not be such an obstacle if Greece could legally issue its own currency, but it can’t.  Worse, the eurozone does not have a clear policy for backstopping depositor protection, as we saw in the Cyprus episode.  At this point, it is quite possible that Europe would stand aside and allow the Greek public to have its accounts wiped out.  There are elements in various governments that would even relish the spectacle as retribution for the sin having voted for Syriza in the first place.   If depositors cannot be protected, Syriza will be out of power in a flash.  This is Argentina territory.

I won’t bother with a discussion of the evolving eurozone banking supervision system; it is too slow and conditional to matter for Greece in 2015.  In all honesty, I can’t see any substitute for an immediate arrangement specific to backstopping Greek deposits.  My sense of the Cyprus experience is that it was chastening for the eurocrats, but I could be wrong.  What can Syriza do if depositors are held hostage as leverage for austerity?  I might be crazy, but I think this could be the one realm in which a print-your-own-euro plan makes sense.  What would happen if the Greek CB created new currency for the sole purpose of redeeming deposit accounts at insolvent banks?

It should be added that, as soon as plans are begun to anticipate a banking crisis, that crisis will accelerate.  This means that negotiations on deposit protection ought to begin immediately in private, and that plans to establish a resolve-and-replace financial facility in Greece have to wait until some solution is reached.  This is the part that worries me the most.

So much for the short term.  The long term objective is to get the Greek economy growing again—to provide jobs, raise incomes, and rebuild public services.  To some extent this will happen by itself as the restraints are lifted.  I disagree with Bill Mitchell, that growth is primarily a function of fiscal stimulus.  Yes, stimulus would do wonders.  But there is immense pent-up demand in Greece, and if a modicum of social security can be restored I think the income multiplier would be quite high—if the trade balance does not become sharply negative again.  Trade has rebalanced during the crisis as a result of demand suppression, not export competitiveness.  In some sectors, like tourism, it is possible that internal devaluation can have an effect, but for the most part this is limited.  I could write a different, equally long post (or longer) about strategies for improving productivity and export shares, but these are very long term and will not do much for Greece in the next several years.

The only alternative in the time frame that matters for Syriza is offsetting transfers.  In a better world the eurozone would come equipped with a range of automatic stabilizers, like a zone-wide unemployment insurance system, that would supply much of the necessary transfer, at least during the initial period in which the Greek economy is severely depressed.  That’s not the real world, though.  The modest proposal of Varoufakis and Galbraith looks to the European Investment Bank to massively expand their portfolio, which, from a Greek point of view, would be experienced as a transfer.  You could regard the current Juncker initiative, which envisions a fifteen-fold leveraging that borders on hallucinatory, as either evidence that the prospects for serious action are hopeless, or that the principle has been acknowledged and now begins the step-by-step process of coughing up the funds.  I don’t know which reading is correct.

A final word about politics.  In his public statements Tsipras looks to upcoming elections in Spain and elsewhere to ignite a pan-European progressive, anti-austerity (can we say Keynesian?) movement which will change the political landscape and put pressure on Merkel et al. to reverse course.  He could be right, but it is all very iffy.  This vision is undercut by the profound, perhaps irreparable, defects of Die Linke as a political force in Germany, and the fact that in several northern European countries the threat from the extreme right, not an upwelling from the left, is the main dynamic.  I wish for the best, but if I’m a Syriza planner my Plan A will not assume a political alignment more favorable than the one we see today.

UPDATE: And here is what Lagarde has to say: "They must reform the efficiency of the state and get their tax collection system working. That’s not austerity. Those are reforms that they still need to do.” I especially like that she says this sternly, as if it were several more strokes of the cat 'o nine tails.

Sunday, January 25, 2015

Introducing Yanis Varoufakis

In the wake of the remarkable electoral victory by Syriza in Greece, the expectation is that Yanis Varoufakis will be the new finance minister.  It is difficult to overstate how important his work will be to the Syriza program: just about everything hinges on the sort of arrangement he can work out with his counterparts in the other eurozone countries.

His name may be new to most observers, even some economists who have just tuned into the Greek drama, but he has been a significant voice in economic debate for many years.  He can speak for himself, of course, and does so quite well, but here I’d like to situate him—how his intellectual background put him in the role he occupies today.

Varoufakis began his economic work as a game theorist.  He first came to my attention when I read his wonderful Game Theory: A Critical Introduction, coauthored with Shaun Hargreaves-Heap.  (It’s not really a textbook for beginners, but develops a trenchant critique at a foundational level.)  Over time, however, Varoufakis drifted away from game theory and moved into macroeconomics and political economy.

To be precise, Varoufakis is a practitioner of International Political Economy (IPE).  This is a diverse field with many intellectual traditions, but the particular strand he relates to takes as its starting point the observation that the current account surplus or deficit positions of countries are not randomly distributed attributes, flipping stochastically from one year to the next, but semi-fixed conditions.  From there the questions revolve around such topics as, why do countries end up in one status or another, what are the macroeconomic forces specific to surplus and deficit countries, how does surplus/deficit status affect the international objectives of governments and their power to achieve them, and what are the consequences of the international economic regimes that result from these political forces?  Researchers in this tradition range from the relatively centrist to the relatively left wing; there is, to my knowledge, no right wing flavor of this corner of IPE.  (Perhaps this is because Keynes is an indispensable point of departure for everyone who works in this field.)  Some names that carry weight in different circles: Barry Eichengreen, Jeff Frieden, Eric Helleiner, Michael Pettis.  (You can get an uncredited introduction to IPE in my macroeconomics textbook, incidentally.  I felt there was enough overlap between open economy macro and IPE, and enough need to consider them in tandem, to integrate them even at an introductory level.)

Varoufakis responded to the 2008 crisis by steeping himself in this literature and then contributing to it.  His book The Global Minotaur: America, the True Origins of the Financial Crisis and the Future of the World Economy, which appeared in 2011, provides an excellent overview of the IPE perspective and links it to themes in left wing economics and politics.  Thus he discusses how the fragility of global financial recycling is a product of but also influences the global order dominated by the US, modern class formation and its expression in domestic political structures, and the  burgeoning inequality of income and wealth.  Framed in this way, the problems we face can’t be solved by technical fixes alone; they demand a revitalization and extension of democracy.  Although it expresses his own views and was not written, as far as I know, in consultation with anyone else, I think the book is consistent with the sort of program Syriza is hoping to implement in Greece and promote in Europe.  You could read it if you want to dig beneath the headlines.  Varoufakis has also maintained an informative blog—strongly recommended.

The job Varoufakis is taking on is truly daunting.  When he walks into a room with other finance ministers, he will probably be the most advanced in terms of academic and intellectual preparation.  But international economic negotiations are governed by political calculation, not rules of empirical evidence or formal modeling.  To take a grandiose analogy, Harry Dexter White was no Keynes, but the text of Bretton Woods has a lot more White than Keynes.  It may turn out that Varoufakis’ earlier work in game theory, like Rational Conflict (1991), will be more relevant to his forthcoming day (and night) job than all the wisdom he’s accumulated in international economics and finance.

Saturday, January 24, 2015

Who Is More "Demented,": Saudi King Salman Or The Washington Post?

Prior to his accession to the throne of the world's largest oil exporter yesterday, pretty much all reports one could find had then Crown Prince Salman ibn Abdulaziz ibn Abdul Rahman al Sa'ud as the Man In Charge during the final decline of his predecessor, the late King Abdullah ibn Abdulaziz ibn Abdul Rahman al Sa'ud, who died at the age of 90, having been born by all publicly available reports in Riyadh on August 1, 1924, reportedly not the fave son of his old man as his mother was the widow of the last al Rashidi Emir of Hail, the ancient family enemies of the Sa'ud family (bear with me, this is relevant later, really).  However, if one googles Salman today, one finds that in fact his mind is "ravaged with dementia" or lesser claims of this sort, with many news sources simply reporting now as a fact that the new king of Saudi Arabia is "demented."  Really?

So, it turns out that all these reports come from a single source, although when I sent it to the blog Crossroads Arabia they refused to print it, today's Washington Post, a story on A16 by Kevin Sullivan and Liz Sly, both of whom should be taken out and publicly flogged in Jama'a Square of Riyadh for writing one of the most incompetent stories ever to appear in that newspaper.

They quote a single source for the claim that Salman is as they claim, Baker Chair Holder at the Institute for Near East Policy, Simon Henderson, who used to be a reporter for the Financial Times,  and who in 2009 wrote a book on Saudi succession.  He is quoted as saying, "Having a king with dementia is the last thing they need at this difficult time...Yemen is falling apart, ISIS is knocking at the door...this is an extraordinarily dangerous Middle East from a Saudi perspective."  Wow, hot stuff. Aside from the report on Salman nobody knew of this prior to his informing us of it.

So, I did some digging.  While nobody else on the planet has provided such claims, Henderson has been putting this stuff out since late December when he reported that he had heard of people meeting with Salman, then Crown Prince with his predecessor in the hospital, telling him that Salman could talk sensibly for several minutes, but then would become "incomprehensible." Maybe, although it  should be kept in mind that there was a battle royal going on behind the scenes with certain Saudi family factions trying to weaken Salman's claim on the monarchy at that crucial time.

So, just how credible more generally is Simon Henderson?  Well, in his December report he was claiming that King Abdullah was 91 years old and that Salman was 78 years old.  Every source I can find has, as I noted earlier, Abdullah being born on August 1, 1924, and Salman being born on December 31, 1935.  I have seen no sources providing any other dates.  You all can do the math.

How about WaPo?  Well, it was bad enough that the authors of this story relied so heavily on the incredibly unreliable Henderson, but they also made even more elementary mistakes.  So, in the very second line of the story they manage to misspell the name of the father of the dead king (and the new king) as "Adbul Aziz."  He was Abdul Azis, although I prefer the more academic and widely used "Abdulaziz."  Anyway, they got the b and d reversed in the name of the founder of the Kingdom of Saudi Arabia.  This is like reporting on "George Wahsington." 

Then these incompetent clunks report the age of the new Crown Prince, Muqrin ibn Abdulaziz ibn Abdul Rahman al Sa'ud, as 71. Every source I can find has his birth date as September 15, 1945. As I said earlier regarding the reporting by Simon Henderson of ages of Saudi royal family members, you all can do the math.  One of the most incompetent articles ever published in the WaPo. Really.

So, what has happened since this demented king took power?  Well, he has formally appointed Emir (Prince)  Muqrin (also known as "Moqrin" and "Mogren") Crown Prince, despite his having a Yemeni concubine for a mother.  Furthermore, he appointed his son, Mohammed, to succeed him as Minister of Defense and also to be Chair of the Royal Court.  I have already reported that another son, Abdulaziz, is a Deputy Minister of Petroleum, and another, Sultan, was the first Arab in space going on a US space shuttle in 1985 and is now the Minister of Tourism and Antiquities, while another, Faisal, is Governor of Madinah province. What a loser, this demented king.  Not on top of things at all.  Just totally incomprehensible.

Furthermore, the second generation succession problem, regarding which enormous amounts of ink ha been spilled, and gobs of dollars have been spent on conferences declaring this problem could not be solved, not to mention Henderson's book, has been resolved by an announcement by this demented king.  He has appointed a new Second Deputy Prime Minister, the oddly named position that has served since the now late Abdullah was appointed to it in 1982 after he threatened  a coup by his SANG units, as the position from which one will become Crown Prince on the death of the current king, with new Crown Prince Muqrin having been in exactly that position until the clearly demented Salman moved him up to his current position.  The new Second Deputy Prime Minister, and thus likely Second-in-Line to become Malik {King) of al Mamlaka as-Sa'udiya al 'Arabiya (the Kingdom of Saudi Arabia) is Mohammed ibn Nayef ibn Abdulaziz al Sa'ud, the first person to be in line for this position who is a son of  a son of the nation's founder rather than being one of his 43 sons, of whom Muqrin is the youngest at (yes!) 69.

I had not had him on my short list, but he is of the several hundred grandsons of Abdulaziz ibn Abdul Rahman ibn Faisal al Sa'ud one who has some serious things going for him.  His late father was Crown Prince until he died and was the hardline Minister of the Interior to which position his son succeeded when he died, and Nayef was the next to last to die of the "Sudairi Seven" sons of the favorite wife of the nation's founder, his first cousin, Assa as-Sudairi, with the last of those sons being the new king, the reputedly demented Salman.  Adding to Mohammed ibn Nayef's cred is that in 2009 al Qaeda attempted to assassinate him, which, as some have noted means that he is obviously a serious person in their eyes. It took them awhile, but eventually the Saudi royal family figured out that al Qaeda was their mortal enemy.

In any case, probably this is all a show, cooked up previously by the 35 member Allegiance Council, set up by Abdullah some years ago to deal with the succession issue, and they acted ahead of time, which explains why gullible Simon Henderson was being fed half-baked rumors, foreseeing that the successor to Abdullah might not be 100% on top of things, so they really needed to get this all resolved before Abdullah died.  We shall not know, but the secretive Saudis have clearly been more than one step ahead of the outsiders trying to report on their decisions, and certainly far ahead of the ludicrous Simon Henderson, not to mention the even more pathetically incompetent Washington Post.

Barkley Rosser

Update:  A further note I should add is that arguments have been made that not only the accession of Salman, but most importantly the announcements of the new deputy Crown Prince and the elevation of his son to two powerful positions represents a victory by the powerful faction of the "Sudairi Seven" of whom Salman is the last living member. But, both Mohammed ibn Nayef and Mohammed ibn Salman are junior members of this faction.  So, pretty clearly their elevation shows that the Sudairi Seven and more specifically their offspring, have won the succession struggle and are in charge.

In particular, the elevation of Mohammed ibn Nayef to be second in line to the monarchy as the first of the second generation to be so in line does put him ahead of some better known and powerful competitors.  Curiously, one of the most well known rivals is Bandar bin Sultan, another offspring of one of the Sudairi Seven, who was born in 1949 compared with Mohammed who was born in 1959.  Some of this may be a matter of age, and this certainly applies for  some of the other rivals.  In any case, Bandar's father was a full brother of both Salman and Nayek (and late King Fahd) and was Minister of Defense for decades and was named Crown Prince when Fahd died and Abdullah became king.

Furthermore, Bandar had long been one of the most powerful and prominent of the second generation, serving as Ambassador to the US between 1983-2005 (the year Abdullah became king). He has also served as Chair of the Security Council and was Intelligence Chief from 2012 to 2014. Close friend of the Bush family and a longtime heavy hitter, he was an obvious candidate for elevation.  However, apparently he has been in conflict with various parties in Riyadh.  He completely disappeared between 2008 and 2010, only to reappear in triumph.  It has been rumored that despite his past friendship with Americans, he has advocated an approach more independent of the US, particularly with regard to Syria, where he advocated funding and supporting radical Sunni opponents of the Bashar regime. He was also a leader of those who criticized Obama for not following through on his threat to bomb Syria after the chemical war attacks.  It may be that Bandar was removed from running Intelligence over these issues, and this may have also ended his chances for  moving up, even if his father was Crown Prince before the full brother of his father who was father of the guy who did get moved up.

There is another faction of second generation leaders in Saudi Arabia, some of whom are the most powerful people in the nation, with all of them cut out.  Probably the problem is age.  I am referring to the sons of the most powerful and revered of all the 43 sons of the nation's founder, the late King Faisal, who was assassinated in 1975.  In that year his second oldest son, Saud, born in 1940, was named Foreign Minister.  Princeton-educated Saud is still Foreign Minister, by now by far the world's longest lasting Foreign Minister, and possibly the most powerful person in Saudi Arabia, aside perhaps from Salman.  Rumor has it that he is not in good health and has tried to retire from his current position, but has remained in it at the strong urging from his family members.  In any case, as his revered father's successor as Foreign Minister, he clearly could have moved up. But age and health have prevented him (Faisal's oldest son, Mohammed, is the Founder of the Islamic Development Bank and a world leader of the international Islamic banking movement).

Another of Faisal's sons is Harvard-educated Turki, born in 1945, who ran Saudi intelligence from 1979-2001, and has also served as Ambassador to both the US and UK.  He has been a very public figured, commenting on Saudi affairs around the world.  He seems to be in good  shape, but he seems to suffer from a similar taint as Bandar, too much time out of the country and too much of a loose cannon not in synch with the family.  In any case, he did not get it.

Finally, we have the "al Faisal" (these brothers now go publicly by that moniker as their last names, implying that they are a new family line separate from the al Sa'ud)., Khalid, born in 1940 and a half brother of Saud and Turki.  He is in good health and currently Minister of Education as well as having previously served as Governor of Mecca and of another province earlier.  At the time that the youngest of the first generation, Muqrin, was named Deputy Crown Prince a few years ago, rumor had it that Khalid was his main rival, even thought Khalid was older than Muqrin.  Reportedly, Khalid had much favor with the late King Abdullah.  But, in the end, the Allegiance Council, the 35 who decide these things, were not yet ready to bit the bullet and select someone from the second generation, instead giving the first generation one last round as king.  By now, with Abdullah's influence gone, Khalid is too old, and for whatever reason, the al Faisals are not getting the ring, with a young member of the Sudairi clan getting it instead.  If there was an ultimate showdown, this was probably it, between the Sudairis and the al Faisals, who have not been mentioned at all in any of the stories about the succession. In any case, they lost.

Friday, January 23, 2015

The Economic Case Against the Keystone Pipeline

It’s pretty obvious.  If there is meaningful regulatory action on climate change, a majority of existing fossil fuel reserves will stay in the ground.  Given the carbon intensity of the Alberta deposits, their development will certainly cease.  Any investments in them will become valueless.

Therefore the proposal to build the Keystone pipeline is a bet that climate action can be put off until there is a return on the investment.  I don’t know how long its payback period is supposed to be, nor who picks up the tab if regulation turns off the tap before that point is reached.  (This should be a journalistic priority, by the way.)  I do know that (1) the resources devoted to this pipeline are real and will be indisputably wasted if policy shuts it down, and (2) those whose lives and livelihoods are sacrificed, like the Harrington sisters mentioned in this New York Times report, will have paid a price for no corresponding social good.

These are economic arguments, to be added to the environmental one, that building the pipeline, by expanding demand, will likely increase the extraction rate of a resource whose every barrel brings us that much closer to a climate nightmare.

Expect No Change In Oil Policy With The Passing Of Abdullah Ibn Abdulaziz Ibn Abdul Rahman al Sa'ud

Abdullah ibn Abdulaziz ibn Abdul Rahman al Sa'ud, king of Saudi Arabia from 2005 until some hours ago, has died at the age of 90. He has been succeeded already by the Crown Prince, Salman ibn Abdulaziz ibn Abdul Rahman al Sa'ud, age 79, last of the powerful Sudairi Seven I(one of whom, Fahd, preceded Abdullah as king), who served as Governor of Riyadh province from 1963 until 2011, when he became Minister of Defense on the death of then Crown Prince Sultan, another of the Sudairi Seven, the sons of the favorite wife (and first cousin) of their father, the founder of modern Saudi Arabia, Abdulaziz ibn Abdul Rahman ibn Faisal al Sa'ud, known widely as "Ibn Saud."

Salman has been replaced as Crown Prince by the youngest of the living 43 sons  of Abdulaziz, Moqrin, age 69, who has served as a provincial governor, director of Saudi intelligence, and most recently as a deputy minister of  defense, whose mother was from Yemen, a circumstance long thought to damage his chances for the succession.  He is in far better health than the new king.  There are two other sons left, Talal, born in 1931 and Ahmed born in1940, but Moqrin will almost certainly outlive both of them to be the last of the sons of the nation's founder.  What this means is that when he finally dies, which could be a few decades from now, the nation will finally fully face the long simmering succession issue of which line of sons of Abdulaziz will become the new royal family line, with this possibly being faced sooner when Salman dies and a new crown prince must be named.

While Abdullah has often been described as a reformer or moderate within the family, both Salman and Moqrin probably deserve this label more than he did. In fact, prior to his accession, he was viewed as among the more conservative members of the Saudi royal family, very strict religiously and close in friendship with the Bedouin tribesmen.  He had served since 1962 as the Commander of the Saudi Arabian National Guard (SANG), the tribally based military not under the Minister of Defense.  In 1979 when ultra-fundamentalists took control of the Grand Mosque in Mecca, the conventional military was unable to dislodge them, but SANG eventually did.  Its HQ was long on the personal palace grounds of Abdullah, and one of his sons succeeded him as its commander in 2010.  His supposed reformism (allowing women to vote and participate in the Olympics and attend the university named for him King Abdullah University of Science and Technology, KAUST), reflected a sort of "Nixon goes to China" syndrome in that he had such a rep for conservatism and religiosity that he could get away with it, although he never did get around to allowing women to drive.

While will oil policy not change?  One of the new king's sons, Abdulaziz ibn Salman ibn Abdulaziz al Sa'ud is the deputy minister of oil under current minister al Naimi.  Without question he has been part of the targeting of the price of oil to be in its current price range of $45 to $50 per barrel that appears to be being enforced by the Saudis and is consistent with what they expected when they announced their planned budget in November.  Salman has a reputation as getting along with the many factions of the royal family,after having built the capital city, Riyadh, into its current magnificence.  He is certainly in agreement with the current policy, indeed, is rumored to have been effectively in charge of the Saudi government recently with the failing of his older half brother.  The new policy of a target oil price between $45 and $50 per barrel most certainly had and has his approval.

Barkley Rosser

Wednesday, January 21, 2015

Econometric Ventriloquism

If you want to know what people believe, ask them. If you want to know what they believe about a complex and controversial policy issue, ask them lots of questions specifically about what their beliefs are about that issue.

Asking lots of people lots of questions is a lot of work. Wouldn't it be easier if we could infer their answers to other questions from their answer to one question? That's where econometrics comes in. By making a bunch of assumptions and calling some variables "control variables," you can get the survey respondents to give you answers to questions they were never asked. It's magic!

You've heard of "dummy variables"? Well, these are dummy survey respondents. And the econometrician gets to be the ventriloquist!


The other day, I ranted about an article by Achim Kemmerling, which purported to wring lump-of-labour blood from a Eurobarometer survey turnip about early retirement. Achim corresponded with me and he seems like a nice enough guy with good intentions. In my reply to him, I mentioned a survey of sympathizers and skeptics of work-time reduction I had done back in 1997 and offered to try to dig up a copy. Thanks to the Wayback Machine, I found my write up of the survey results, Sabbath of the Land, which I have converted to a pdf file and uploaded to Scribd. Re-reading it after nearly two decades, it impresses me as a substantive rebuttal to claims that support for policy "A" implies belief in idea "B".

Tuesday, January 20, 2015

Why Gossip Trumps Ideas

Nick Rowe kvetches:
"What bugs or puzzles me is that this rather unoriginal and not very great post, which I nearly didn't bother publishing at all, is getting all the attention in the econoblogosphere, while my following post, on red money, which (I think) is far more original, and far more interesting, and a far better post, is getting almost none."
Every once in a while I post something worthwhile that grabs a lot of views, sometimes even a few comments. Often, though, the views and comments are in inverse proportion to the originality and importance of the post. Sometimes I deliberately post trash talk just for the thrill of getting a few extra hits. Everything is data.

I'm sure you could find a scientific paper on this but why bother. It's obvious. Gossip trumps ideas. You don't see scholarly publications on sale near the supermarket check out counter. What is that telling us? It tells me that people are more interested than anything else in what other people are saying about what other people are doing. Keynes's beauty contest. Mimetic desire.

Where do "expectations" come from? They come from hearing what other people are saying about what their expectations are. Or thinking you've heard what other people have said...

The Luddites Had a Time Machine! (and other claims the truth or falsehood of which is not relevant)

According to Achim Kemmerling, a political economist at Central European University in Budapest, the truth or falsehood of claims is irrelevant ("The end of work or work without end? How people’s beliefs about labour markets shape retirement politics," Journal of Public Policy, Published online: 12 January 2015).

Now, I have taken Kemmerling's statement somewhat out of context. His original statement, with emphasis added to the parts left out, was:
For the purposes of this article, however, it is not relevant whether the claims are true or false, as long as (some) people believe in them.
Kemmerling is dead wrong. Whether the claims are true or false is relevant for the purposes of his article -- no less than the context of his claim about its supposed non-relevance.

What are those claims? The claims Kemmerling says he is investigating are:

  1. "that there is an upper limit to the total number of jobs in a society" and/or 
  2. "that this upper limit of total jobs will fall as time passes due to processes of globalisation or technological change."

A rash of subsidiary claims follow from those. The most important (for the purposes of Kemmerling's article) is that "some people believe in them." The second is that the claims are fallacies. A third is that the assertion that "some people" believe in these ideas is itself false or at least grossly exaggerated. The truth or falsehood of the claims being investigated is thus relevant at least to the extent of its bearing on these subsidiary claims.

Kemmerling extrapolates belief in the lump-of-labour idea from agreement with Eurobarometer survey question 68.1: "People in their late 50s should give up work to make way for younger and unemployed people." As he admits, the survey question "imperfectly proxies the idea of a trade-off between these two types of workers." Although he concedes "there is no perfect remedy" for this discrepancy, he maintains, "one can arguably control for alternative explanations such as norms."

That's nonsense. The word "arguably" must be construed as referring to plausible arguments. Kemmerling presents none. Instead, he reports on variations in responses from different sub-groups and speculates on norms that might account for those differences.These are not controls. These are excuses.

One can only marvel at the heroic lengths Kemmerling goes to to coax the sought after answer out of the recalcitrant data. But why on earth would he even bother if "it is not relevant whether the claims are true or false"? Despite that discrete disclaimer, Kemmerling assumes that the lump-of-labour is indeed a widespread belief and a fallacy and implies that it is an obstacle to presumably (from his perspective) more rational policy reform. More crucially he assumes that not just some but many people believe in the fallacious, obstructive idea. The tell-tale appears in his reference to the nineteenth century Luddites:
The causal belief investigated here is the lump-of-labour idea... This idea is far from new. In the early nineteenth century, the Luddite movement destroyed factory machines as technical progress threatened to make workers redundant.
How did the Luddites answer Question 68.1 of the 1811 Eurobarometer survey? There was no Eurobarometer survey in 1811! There also was no Eurobarometer in 1753 when Peter Kay, inventor of the flying shuttle, had his house burnt down by Luddites EVEN THOUGH LUDDITES DIDN'T EXIST UNTIL THE NINETEENTH CENTURY!

From Why Nations Fail: The Origins of Power, Prosperity, and Poverty by Daron Acemoglu, James Robinson. page 85:


How did the nineteenth century Luddites burn down a mid-eighteenth century house? The obvious answer is they must have had a time machine (assuming that it is not relevant whether or not Acemoglu and Robinson's claims are true or false).

The claim about the Luddites is a historical claim, as is the claim about belief in a lump-of-labour fallacy. No amount of agnosticism about the truth or falsehood of claims or appeal to control variables for alternative explanations will enable a researcher to arrive at conclusions regarding subjects' beliefs about A from their answers to questions about B, especially if the researcher isn't aware that "beliefs about A" is an old, old fable with propagandistic origins.

Some more context:
Hence, the question of the lump-of-labour fallacy is a controversial one even among academics (Walker 2007). For the purposes of this article, however, it is not relevant whether the claims are true or false, as long as (some) people believe in them.
Walker 2007 challenged the authenticity of the fallacy claims. More specifically, Walker 2007 challenged the assertion that support for certain policy proposals implied an underlying and motivating belief that there is a fixed amount of work.

Walker 2015 regrets that he was not aware at the time that Pigou (1913) and Dobb (1928) had beaten him to the punch with their respective ignoratio elenchi critiques of the supposed fixed work-fund fallacy (another name for the lump-of-labour). A.C. Pigou argued that it would:
...be unwarrantable to conclude that, because the reasons which popular thought offers in defence of any thesis are invalid, therefore, that thesis is untrue. If it were a good ground for rejecting an opinion that many persons entertain it for bad reasons, there would, alas, be few current beliefs left standing!
He concluded that some (though not all) restrictions on the supply of labour can expand employment on the condition that they "succeed in rendering the labour and capital of the rest of the community more effective in production."

Maurice Dobb's critique was more direct and decisive. He pointed out that even under the assumption that restriction of the supply of labour would decrease aggregate income per worker it could still "increase wages in proportion to the worker's expenditure of energy and his 'wear and tear,' and it can increase Relative Wages, or wages as a proportion of the total social income."

In short, it's not only about how much you can get for your labour but also how much you have to work to get it. "Opportunity cost," in economist jargon. There may indeed be more jobs and more total income if older workers stay in the work force longer but that could also mean everyone was working more for proportionately less pay.

The more elaborate answer to the presumed lump-of-labour idea is the analysis of the social cost of labour as articulated by John Maurice Clark and K. William Kapp. As Robert Prasch has pointed out, analysis of the social cost of labour:
...presents us with an underlying logic of labor market regulations. Laws concerning wages, hours, health, or safety may still, of course, be criticized for being misspecified or ineffective. However, acknowledging the existence of a social cost of labor means that they can not be considered, ipso facto, to be "distortions." On the contrary, they represent a civilized society's response to the inevitable limitations of relying solely on market prices to ensure the sustainability of the economy, society, and polity. 
It would be presumptuous to attribute subjects' answers to Question 68.1 of the 2001 Eurobarometer survey to a sophisticated grasp of the social cost of labour. However it would be no more presumptuous than attributing the answers to a belief in a lump-of-labour idea. And a lot less preposterous.

UPDATE: Further evidence of Luddite time travel from Crandall, Parnell and Spillan, Crisis Management: Leading in the New Strategy Landscape, 2010:
History is full of examples of those who have shunned technology. For some, technology itself was the crisis. The Luddites, for example, carried out violent attacks on technology in the early 1800s by smashing machines in industrial settings. However, the attacks, which originated in England during the Industrial Revolution, were actually more of a social protest against falling wages, unemployment, and rising food prices (Malcolm. 1970; Wren. 1987). In such an environment the threat that machines would displace jobs seemed realistic. Unfortunately for the Luddites. their actions went too far, even to the point of burning down the houses of machine inventors John Kay and James Hargreaves (Wren, 1987). --.
Interestingly enough, Crandall et al. get the story right about the Luddites actions being "actually more of a social protest against falling wages, unemployment, and rising food prices." I can't confirm whether or not the claim that Luddites burned down John Kay's house came from "Wren 1987."

Sunday, January 18, 2015

The Hours of Labour and the Problem of Social Cost

From The Hours of Labour and the Problem of Social Cost

In "The Problem of Social Cost," Ronald Coase (1960) examined one variety of presumed market failures – outcomes that Cecil Pigou (1952) had described as “incidental uncharged disservices” (or uncompensated services) but are now commonly referred to as "externalities." The incidental quality of these effects makes them a social cost. The economic analysis Coase challenged and the standard examples he re-examined were taken from Pigou's discussion in part II of The Economics of Welfare. Coase argued that the suggested courses of action in the Pigovian tradition – liability, taxation or regulation – were inappropriate and often undesirable.

Coase claimed that the traditional approach to the problem of social cost "tended to obscure the nature of the choice that has to be made" (1960, 2). He characterized the question posed by the approach as "one in which A inflicts harm on B and what has to be decided is: how should we restrain A?" He objected that the problem was really a reciprocal one and the real question should be "should A be allowed to harm B or should B be allowed to harm A? The problem is to avoid the more serious harm."

However, Coase didn't consider the full range of Pigou's examples and analysis. While Coase’s restatement of the problem may have been appropriate to the specific externality problems discussed by Pigou in part II, it entirely overlooked the radically different labour market problem encountered in part III, in which competitive pressure compels an employing firm to inflict harm on both itself and its employees and thus regulatory restraint of the firm (and competing employers) may benefit both.

Along with the majority of the preceding Pigovian tradition, Coase evaded the thorny questions of working conditions and unemployment. Whatever gains in tractability may be accomplished by such a maneuver are more than offset by a forfeit of realism and of insight into the complex interdependency of economic factors in the long period. The determination of the hours of work provides a particularly compelling example of a circumstance in which mutual benefit could result from an imposed non-market restraint.

Saturday, January 17, 2015

Eleventh Dimensional Chess for Beginners

Jared Bernstein at Post Everything:
At the heart of the president’s new plan is the closure of a big loophole that benefits the wealthy and inefficiently skews the tax code. When an asset (like a stock) you own appreciates, that income is known as capital gains (what’s that? you depend on your paycheck, not your cap gains? that’s kinda the point…read on). If you sell that asset, you’re taxed, and taxed at a preferential rate, on the so-called “realized” gains. 
But if you hold onto that asset you pay no tax on the “unrealized” gains. That income currently escapes taxation, even when—get ready because here comes the loophole, one the White House says is “the largest capital gains loophole – perhaps the largest single loophole in the entire individual income tax code”—you check out of this crazy thing called life, i.e., you die, and you turn those appreciated assets over to an heir.
As Jared notes,  "progressive policy makers have decided that 'can we get this through the current Congress?' is not a useful question for crafting the necessarily [sic] policy agenda in our age of inequality." Well, yeah, but... sounds like a good idea with populist appeal. I mean, what a scam sweetheart deal for the .01%. So why didn't the Democrats propose this and campaign HARD on it in last November's midterm elections?