The Breakdown of the Neo-Classical Synthesis

Brad DeLong, Robert Waldman and Paul Krugman are having a conversation about the breakdown of the so-called "Neo-classical synthesis."  The conversation begins with Joseph Stiglitz at the Minsky lecture in 2009:

The advocates of free markets in all their versions say that crises are rare events, though they have been happening with increasing frequency as we change the rules to reflect beliefs in perfect markets. I would argue that economists, like doctors, have much to learn from pathology.We see more clearly in these unusual events how the economy really functions. In the aftermath of the Great Depression, a peculiar doctrine came to be accepted, the so-called “neoclassical synthesis.” It argued that once markets were restored to full employment, neoclassical principles would apply. The economy would be efficient. We should be clear: this was not a theorem but a religious belief. The idea was always suspect…

Brad doesn't really state a position on all this, but explains the issue thusly:

There are, I think two lessons that can be drawn from big depressions. You can draw the Keynes lesson, which is also the Milton Friedman lesson, that if only you can stabilize the trend of aggregate demand (and compensate for externalities either through clever Pigovian taxes or ingenious Coaseian carving of property rights at the joints) then the competitive market system does absolutely fine. You can draw the Stiglitz lesson–which is that such a gross market failure in the large tells us that every single market everywhere in the world is probably riddled with smaller-scale market failures, and that comprehensive and detailed governmental structuring of institutions at every level–macro, mess, and micro–is necessary in order to properly promote the general welfare.

Krugman basically says he is still a disciple of the synthesis:

The brand of economics I use in my daily work – the brand that I still consider by far the most reasonable approach out there – was largely established by Paul Samuelson back in 1948, when he published the first edition of his classic textbook. It’s an approach that combines the grand tradition of microeconomics, with its emphasis on how the invisible hand leads to generally desirable outcomes, with Keynesian macroeconomics, which emphasizes the way the economy can develop magneto trouble, requiring policy intervention. In the Samuelsonian synthesis, one must count on the government to ensure more or less full employment; only once that can be taken as given do the usual virtues of free markets come to the fore.

It’s a deeply reasonable approach – but it’s also intellectually unstable. For it requires some strategic inconsistency in how you think about the economy. When you’re doing micro, you assume rational individuals and rapidly clearing markets; when you’re doing macro, frictions and ad hoc behavioral assumptions are essential.

....although with reservations:

I still think that the Keynes/Samuelson view is reasonable, although market imperfections loom larger in my mind than they used to. But these are not reasonable times …

Waldman tends to lean towards the Stiglitz position:

So why is the Keynes-Friedman-Samuelson position unstable ? I note that on the questions of public policy where they all agreed, I tend to agree with them. However, I definitely do not believe in the neoclassical synthesis as described by Stiglitz. I don’t think that, even given full employment, markets are efficient. I tend to advocate leaving the market alone except for 1) redistribution from rich to poor 2) mandatory insurance is market insurance is prevented by the adverse selection death spiral 3) Pigouvian taxes to internalize externalities 4) aggregate demand management 5) Anti discrimination legislation and 6) I’m sure there are lots of other exceptions which don’t come to mind.

Ok, with that background, what do I think of all of this?

I'm going to beg the question right up front and say, what the hell are we talking about here?  When we ask the question of whether markets are efficient, there is an implied goal:  are they efficient at doing what?  In other words, what do we want the marketplace to do?

Frankly, I'm not certain there is consensus even on this basic point, whether among economists or in society as a whole.

Personally, I would describe the purposes of any economic system as (i) to produce or acquire goods and services, and (ii) to distribute the goods and services produced or acquired in a fair and equitable manner.  At a minimum, the amount of goods and services produced should be sufficient ensure the survival of all members of the society. Ideally, the amount produced and the method of distribution should be sufficient to permit each member of society a minimum level of freedom.  Because a person who must struggle merely to survive is a person who is not free.

I'll have more to say about this topic....

We Are Becoming Brazil

Atrios links to this post about the 76ers new training facility:

Talk to Tom Knoche about the just-announced deal to move the NBA’s 76ers training facility from Philadelphia to Camden, and the Rutgers-Camden urban planning professor pointedly says: “What does this mean for the residents of Camden? Not much.”

In a city that was ranked the poorest in the country last year and where the unemployment rate is 16.6 percent (double that of New Jersey and far beyond the national average of 6.3 percent), New Jersey’s Economic Development Authority is going to spend $82 million in tax subsidies to build a state-of-the-art venue in a deal that will deliver approximately 250 jobs. With 200 of those positions already filled, the state is paying a whopping $1.6 million per new job created.

EDA states that its mission is to create “public/private partnerships to bridge financing gaps and to increase access to capital by the State’s business community with an emphasis on small and mid-size businesses and not-for-profit organizations.” But the 76ers are no small business — they are owned by billionaire Joshua Harris and, as the Inquirer noted, the 76ers’ development broker is Philip Norcross, brother of State Sen. Donald Norcross, a Democrat who represents Camden.

State Sen. Michael Doherty sharply critiqued the deal in an official statement, saying “the facility will essentially be a free gift from the hard-pressed taxpayers of New Jersey to Joshua Harris, the billionaire owner of the team … Local governments are being forced to cut to the bone … How can New Jersey not make this year’s full pension payment, but the state government can find an extra $82 million for a basketball practice facility?”

In Brazil, people are rioting in the streets over this sort of thing.

I have a feeling that people in the U.S. will be doing the same pretty soon if this sort of bullshit doesn't stop.

Wow! (UPDATED)

Eric Cantor Loses to Tea Party Primary Challenger.

Just...wow!

Update:  Just to add that I think Booman hits the nail on the head here:

There is literally no hope now that the Republican Party can do one thing to improve their performance with the Asian or Latino communities. In fact, since it is now evident that it is not sufficient to do nothing about immigration reform, but one must spend all day bellowing about the brown hordes crossing our border, Republican politicians are powerfully incentivized to loudly advertise their disgust with the changing demographics of the country. And they will. The GOP is guaranteed to do much worse with Asians and Latinos in 2016 than they did in 2008 or 2012.

Think about this. Wall Street and the Chamber of Commerce and Agribusiness and the evangelical community all lobbied the House Republicans to pass immigration reform and they got nowhere. That is how incredibly racist the people are in these gerrymandered districts. When has the Republican Party ever before told those powerful conservative interests to go fuck themselves? Normally, when those groups speak, the GOP jumps to do their bidding.

Eric Cantor didn't lift a finger to pass a comprehensive immigration bill and he was voted out anyway because he wasn't enough of a hard-ass on the issue.

The effect of Cantor losing will be more important than the causes of his defeat. Some will argue that immigration wasn't the only or even primary reason he lost. That won't matter for presidential politics, because Republicans will behave very counterproductively in response to Cantor's loss.

But it's true that these white, rural, conservative Christian voters have no reason to be happy with the Republican Establishment. The Republican Establishment has been a disaster on foreign policy. They have not brought back the lost manufacturing jobs. They have been losing the culture war. They haven't overturned Roe v. Wade or stopped the march of gay rights. They haven't stopped the dissolution of the nuclear family. They haven't prevented a prescription drug epidemic in their communities. They've been losing elections.

They have not been delivering in any tangible way.

Except on guns. Guns, guns, guns. Look where that's getting us by scanning the headlines over the past couple of weeks

The GOP ramps up the hatred of gays and blacks and Latinos and Muslims and "takers" and liberals and academics and teachers and journalists and scientists and urban-dwellers and secularists and...

...they oversee the biggest growth in wealth disparity in ninety years and offer nothing for jobs but tax breaks to corporations and the wealthy, and...

then they hand these aggrieved people guns, no questions asked.

Is it any wonder that every few days a new rivet pops and someone shoots up a school or a mall or Wal-Mart?

Non-Competes

Alex Tabarrok at Marginal Revolution has an interesting piece up about non-competes which talks about how they reduce innovation and so overall are bad for the economy.  It links to this New York Times article about how noncompetes are popping up everywhere.

Non-competes are proliferating everywhere.  I know a woman who works at a beauty salon - one of a chain of nearly 600 franchises nationwide - making $10 an hour plus tips in NYC.  She was made to sign a noncompete in order to get the job.  Frankly, this is bordering on the ridiculous.

I'd like to know whether this sort of thing is becoming more prevalent in other kinds of low-wage jobs.  It seems to me that if these clauses are enforceable employment becomes a sort of indentured servitude.

Noncompetes of this kind used to be unenforceable.  I don't know what the state of the law is lately, but I would find it shocking if the noncompete that my friend signed could actually be enforced.  But that's not really the point.  There is an in terrorem effect that these kinds of clauses have.  Most people like my friend wouldn't think twice about signing this because they need the job, but worry that if they leave their jobs they won't be allowed to work elsewhere.  Just the threat of enforcement is enough to keep employees in line.

Frankly, I'd like to see this sort of thing be outlawed.  Companies should not be allowed to insert clauses into contracts unless they are clearly enforceable.  If they do so they should be fined.

I'm back

So, I'm finally back.  I must admit that it's been difficult for me to find the time to keep up with this thing, but even more so, it's been difficult to keep motivated.  I don't know how other bloggers do it to be honest, at least if they do it on the side as I do.  In my defense, let me just say that my "real" job now is working as a writer of tax law treatises, and somehow after 9 or 10 hours a day (or, more recently, 12 to 14) of sitting in front of a computer, I find it difficult to motivate myself to spend another hour or two for blogging.

Anyway, a major deadline has just passed, and the intensity of my writing activity will start to diminish, and I hope to begin posting regularly here again.  Starting with this.  We'll see how long that lasts.

It's not as if there hasn't been a lot of interesting things to pique my interes over the last several months.  Just a few topics I've wandered across that I've been thinking a lot about.

1. At Crooked Timber over the last two weeks there's been a symposium on Joseph Carens' book, "The Ethics of Immigration/" Carens is a philosophy professor at the University of Toronto who has devoted his life to this topic - I take it this is his magnum opus. I haven't read the book yet (hopefully I will at some point), but if you read the posts you can gather a lot about what it's about. And the posts themselves contain a lot of interesting and provocative discussions. Immigration is a topic I have always been interested in -- one I have some strong views about (well, I have strong views about a lot of things...). I've been trying to wrap my mind about all I have read here and will be posting on it soon.
2. Ta-Nehisi Coates wrote quite a piece at the Atlantic last month called "The Case for Reparations," The headline is the real grabber: ">Two hundred fifty years of slavery. Ninety years of Jim Crow. Sixty years of separate but equal. Thirty-five years of racist housing policy. Until we reckon with our compounding moral debts, America will never be whole." I agree. I'm not sure that reparations are the answer, and I genuinely don't think that the sins of the fathers should have to be visited upon the sons. But people really should read this thing all the way through, and think about what needs to be done make this country one in which all people truly do have equal rights.
3. And, of course, Thomas Piketty's book and the reactions to it continue to fascinate. For me, the whole thing has a kind of resonance, because it raises an issue that I struggled with years ago when I was working as a Wall Street tax lawyer, during one of those reflective phases when I was questioning what the hell I was doing. I distinctly remember being troubled at the realization that the economy was growing at 3 or 4% a year, and my clients were making returns of 10-15% on their investments, and wondering how was this sustainable over the long run. Believe me, every deal I worked on in the 1990s, the projected returns were at least that high. I'm glad to see that more and more people are beginning to question how we can keep going like this.

There's more, lots more, that's caught my eye over the last several months.  Hopefully now I'll be able to share my thoughts on them more often.

The Real Reason for Unrest in Ukraine...and Bosnia, Thailand, etc., etc.

One of the great untold stories behind the unrest in the Ukraine that boiled over this week is the enormous economic strain that is being placed on these countries by global financial markets.

In particular, the global markets for food commodities.

Yves Smith linked this morning to this post that addresses this topic.  The upshot is that rising food prices are triggering unrest all over the globe:

Just over a year ago, complex systems theorists at the New England Complex Systems Institute warned us that if food prices continued to climb, so too would the likelihood that there would be riots across the globe. Sure enough, we're seeing them now. The paper's author, Yaneer Bar-Yam, charted the rise in the FAO food price index—a measure the UN uses to map the cost of food over time—and found that whenever it rose above 210, riots broke out worldwide. It happened in 2008 after the economic collapse, and again in 2011, when a Tunisian street vendor who could no longer feed his family set himself on fire in protest.

Bar-Yam built a model with the data, which then predicted that something like the Arab Spring would ensue just weeks before it did. Four days before Mohammed Bouazizi's self-immolation helped ignite the revolution that would spread across the region, NECSI submitted a government report that highlighted the risk that rising food prices posed to global stability. Now, the model has once again proven prescient—2013 saw the third-highest food prices on record, and that's when the seeds for the conflicts across the world were sewn.

A Reminder About...Math

I was reading this post by wolf Richter about the recent market gyrations when I came across this passage:

Could the party be over? No way, José. This party will neverbe over, the thinking goes. This is just a temporary blip, a healthy pullback, a minor squiggle. The market is building a base for the next leg up..... The Wall Street Journal reports about those intrepid investors:

They view the current pullback as a natural occurrence, the kind of passing storm that can hit every year or so. Since the Dow hasn’t fallen 10% since the middle of 2011, a drop of that size is overdue, they say. Some are even talking about a 15% or 20% decline without sounding too upset, because they think it will be over in a few months and stocks will finish the year with gains. And, they point out, stocks gained more than that last year alone, when the Dow was up 26.5%.

And I thought to myself, what bullshit!  But I see this sort of thing all the time.  Sure we had a 20% drop this year, but last year we gained 25% so overall we're not doing that bad, right?

Um, no.  It's basic math.  If on Day 1, Year 1 I invest $1,000 and gain 25%, I have $1,250 at the end of Year 1.  And if in Year 2, I lose 20%, at the end of Year 2 I have....$1,000.  Yes, 20% of $1,250 is $250.  I've lost in Year 2 everything I've gained in Year 1.

This isn't investors talking.  This is traders, and they think investors are stupid.

They Could Have Come Up With a Better Headline

Today's Wall Street Journal: "The Downside of a Lower Unemployment Rate"

When I first saw this headline I thought the point of the story was why it's good to have high unemployment.

Instead, the story is that a lower unemployment rate doesn't mean that things are getting better: the rate is going down because people are giving up looking for work and dropping out of the labor force.

Like I said, could have been worded better.

Delaware Arbitration: Custom Justice for the Big Boys

Digby points to an interesting case that I had not heard about up until now.  The case, decided in October by the Third Circuit Court of Appeals, deals with an "innovative" procedure set up in Delaware to resolve disputes involving Delaware business entities (Delaware is the premier state when it comes to corporate law in the U.S.):

The Delaware Court of Chancery has taken its fight to have a secret business arbitration court to Washington.

Attorneys for the court late Tuesday filed a 116-page “petition for a writ of certiorari” with the U.S. Supreme Court asking the court to review and overturn the decisions of two lower courts that found the secret court violated the U.S. Constitution and the history of openness in the court system.

In their petition to the U.S. Supreme Court, attorneys for the Chancery Court argue that the secret arbitration process does not violate the First Amendment right of access to the courts because it is not a trial, that there is a growing demand for such arbitration and the process is necessary to keep lucrative corporate litigation from being taken overseas.

Here is a description of Delaware arbitration program from the Third Circuit's opinion (footnotes and citations omitted):

Delaware’s government-sponsored arbitrations are not open to all Delaware citizens. To qualify for arbitration, at least one party must be a “business entity formed or organized” under Delaware law...and neither party can be a “consumer.”....The statute is limited to monetary disputes that involve an amount-in-controversy of at least one million dollars....

Once qualified parties have consented “by agreement or by stipulation” to avail themselves of the proceeding, they can petition the Register in Chancery to start arbitration....The fee for filing is $12,000, and the arbitration costs $6,000 per day after the first day....After receiving a petition the Chancellor selects a Chancery Court judge to hear the arbitration....The arbitration begins approximately ninety days after the petition is filed, and, as the parties agreed in oral argument, is conducted in a Delaware courthouse during normal business hours....Regular Court of Chancery Rules 26-37, governing depositions and discovery, apply to the proceeding, but the rules can be modified by consensual agreement of the parties....

The Chancery Court judge presiding over the proceeding “[m]ay grant any remedy or relief that [s/he] deems just and equitable and within the scope of any applicable agreement of the parties.”....Once a decision is reached, a final judgment or decree is automatically entered....Both parties have a right to appeal the resulting “order of the Court of Chancery” to the Delaware Supreme Court, but that court reviews the arbitration using the deferential standard outlined in the Federal Arbitration Act....Arbitrations can therefore only be vacated in relatively rare circumstances, such as when a party can prove that the “award was procured by corruption, fraud, or undue means” or that the “arbitrator[] w[as] guilty of misconduct.”....

Both the statute and rules governing Delaware’s proceedings bar public access. Arbitration petitions are “considered confidential” and are not included “as part of the public docketing system.”

There is so much that is wrong with this system I don't know where to begin.

The Third Circuit held this program unconstitutional because the proceedings were held in secret, and the State of Delaware is appealing this decision to the U.S. Supreme Court.  There is a long standing tradition that both criminal and civil trials are held in public, and the Supreme Court has long held that the public has a First Amendment right of access to criminal trials, and most of the Circuit courts have recognized a right of access to civil trials.  It will be interesting to see whether the Supreme Court takes the case and, if so, whether it agrees with the Circuits.

To me, this is just another example of the increasing and insidious tendency of our governments (at all levels, federal and state) to pull a veil of secrecy over its operations.  I have long felt that there is very little that the government should be permitted to do that is kept secret from the people.  We can't have government by consent of the governed if the governed are kept in the dark about what the government is doing.  Outside of criminal investigations and national security, there is no context for government action in which secrecy is warranted.

But even beyond the secrecy aspects of this, there is so much wrong here.  What the State of Delaware has set up is an expedited process whereby legal entities with disputes can leapfrog over others and obtain expedited access to the judicial system over and above individual citizens.  It effectively grants legal entities such a corporations and limited liability companies with preferred access to the wheels of justice over voting citizens of the state.  This is beyond "corporations are people too" - this is corporations are "super-people" entitled to preferred rights.  The fact that the amount in dispute has to be greater than $1 million just makes this worse.

How can anyone think this sort of thing is ok?

Davos (UPDATED)

You know, a decade ago all of the major news outlets were covering the World Economic Forum at Davos and the web was alive with people writing stories and expressing opinions about what was going on there.

This year I haven't seen anything about it.  In fact, I didn't even know it was going on until one of my facebook friends linked to it a minute ago.  And today's the third day.

Seems to have fallen off everyone's radar screen.  Not that that's a bad thing....

UPDATE:  From the NY Times on why some people are staying away from Davos:

[T]he leaders of some of the largest and most transformative companies are demonstrating, with their absence, the difficulty of convening a global conversation with all the main stakeholders. Given that one of the themes this year is how to address economic inequality, it would be helpful to have the world’s largest employers participate in that discussion, not to mention a sampling of rank-and-file workers, who never receive an invitation.

Obviously not a topic that interests them....

Christie and Sandy Aid - Hypocrisy Personified

Remember when Chris Christie was chastising the Republican Congress on the unconscionable delays in passing Sandy aid?

Noting that lawmakers on both sides of the aisle provided relief for victims of past national disaster at a greatly expedited pace, Christie charged that Republicans put politics “before our oaths to serve our citizens.” “Last night, the House of Representatives failed that most basic test of public service and they did so with callous indifference to the suffering of the people of my state,” he said.

“There is only one group to blame for the continued suffering of these innocent victims: the House majority and their Speaker John Boehner (R-OH),” Christie declared. Historically, “disaster relief was something that you didn’t play games with, but now in this current atmosphere everything is a subject of one-upmanship,” he continued. “It is why the American people hate Congress.”

Kind of ironic that a year later he's being accused of doing the same thing, no?

You know, Christie's stance in support of his state ingratiated him with all the citizens in his state and was probably the biggest reason for his overwhelming victory in November, including strong support from Democratic voters.  They have every right to feel betrayed by his hypocrisy.

Freedom Bankruptcy

Freedom Industries that is.  The company whose chemical leak knocked out water to over 300,000 people filed for bankruptcy today.

The company was just acquired in December by Cliff Forrest, who has a number of interests in the coal industry according to this Washington Post article.

According to the bankruptcy filing, Freedom Industries owes back taxes to the IRS dating to 2000.

It also, reportedly, has no insurance to cover damages from the leak.

So how stupid was this guy for buying this Company?

Answer: as stupid as the federal, state and local governmental officials that let this happen in the first place.

In Case You're Wondering

If there  is an unduly long time between posts, its either because (i) I'm up against a deadline in my "real" job, or (ii) reading something really interesting.

Currently, it's (ii).  I'm reading this:

Fascinating....and scary.

Almost done.....

My Reaction to the Benghazi Report

The Senate Select Committee on Intelligence came out with its Benghazi report two days ago.  This passage is from the "Additional Views" of the Republican members of the committee:

The failures of Benghazi can be summed up this way: the Americans serving in Libya were vulnerable; the State Department knew they were vulnerable; and no one in the Administration really did anything about it. The Intelligence Community does not collect intelligence about threats to our security in dangerous place so it can be ignored by senior decisionmakers. Nor should a Regional Security Officer's repeated warnings go unheeded. Yet, the intelligence and warnings from the field were met by this Administration with a deafening silence. The four Americans who perished in Benghazi deserved better from their country.

OK.  Let's take this as a given. But....

The 26 women and children who died at the Sandy Hook Elementary School deserved better from their country, as do the hundreds of children - CHILDREN - who die gun deaths each year.

The 15 people killed and 160-plus people injured in West Texas deserved better from their country, as do the 4,000 plus people who die in workplace injuries each year.

The 300,000 who get their water from the Elk River in West Virginia deserved better from their country.

The millions of people who lost their homes in the wake of the financial crisis deserved better from their country.

If, over the last 6 years, employment grew at the same rate as the growth of our population, 15 million more people would have jobs today.  They deserve better from out country.

Until Senators Chambliss, Burr, Riche, Coats, Rubio and Coburn display the same level of concern about these people as they do about the four people who died in Benghazi, I won't believe they are saying these words for any reason other than scoring political points.

Until they show that concern, all they'll get from me is a big "fuck you."

The Taxpayer Advocate Report

My take on it is here.