Ingham's The Nature of Money

Geoffrey Ingham, The Nature of Money,  I think this is a remarkable book.  I'm a little out of my depth here (and actually, I haven't finished it) but it's the most useful thing I ever read on the topic.  Put narrowly, it is just what its title says it is: an attempt to probe beneath the surface of a subject so manifestly cloaked in opacity.  It's written by a non-economist, which is good.  It's written by a self-admitted sociologist* which is better.  And perhaps even more remarkable: non-economist academics who stray into the field often stumble into a bog of abstract fulmination which suggests that after all, they really don't know much of what they are talking about.  Ingham by contrast sounds like a sociologist who has been locked up with economists for a decade or so and lived to tell about it (from what I read somewhere, I think this last guess is more or less correct, but I can't put my finger on the source just now).

You don't read many pages of Ingham without thinking that this is the kind of book that David Graeber thought he was writing, or perhaps should have written.  It isn't really; Graeber is must much more scattershot richer in detail, far more intent upon testifying to his disaffection with the current system.    I don't remember Graeber citing Ingham, but god bless Kindle search, it takes just a moment to determine that--there he is, some 15-plus citations text and footnotes together.  It's none too few: I can hardly accuse Graeber of ripping off Ingham but on the whole I'd say the most arresting and/or engaging parts of Graber's book are the parts he gets from Ingham.  I see that Ingham reviews Graeber here; I  haven't read beyond the ungated first page. But I see he wants to  "focus particularly on what I take to be the underlying threads--his analysis of the nature of money, its relationship to debt, and the moral basis of economic life."  Exactly. Although actually I haven't seen that much in Ingham yet about "the moral basis of economic life;" but as I say, I'm not finished.

Continuing what I guess you could call this chartalist bent, I've lain my hands on a copy of Keynes' Treatise on Money.  Eeuw, do I really need to read all of it?
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*Did I just compliment a sociologist on his writing style?  Yes, I believe I did.

And BTW:  Pardon the even-more-than-usual array of typos.  I should not blog after 9 pm.  Or wear white after Labor Day.

One More: One hundred and seven dollars? You gotta be kidding.

DeLong on Piketty; Economist on Banks

Two can't miss weekend reads:  One. the  "Economist Essay" on the history of financial crises; and two, DeLong on Piketty--i.e., P's magisterial new study of inequality.  The Economist piece explains itself and I stand ready to offer it to anybody who needs an updated analysis of why banks ye have always with you and why they are such a damn nuisance. DeLong is a bit more technical and abstract, but he makes a couple of thoroughly accessible points that I hadn't seen elsewhere. One, that Piketty (this isy) seems to assume that “wealth” in a society = concentration. Perhaps it does, but it need not; we can imagine a society that piles up wealth and spreads it around so everyone becomes a rentier. Likewise I suppose we could imagine one where wealth concentrates even as it declines.

Two, DeLong points out that Piketty is shaky on what means by “return.” DeLong suggests four candidate-meanings and I think I get the drift although I'll admit I'm a little unclear on just how he draws his lines (hey, I was a little drunk last night and I didn't get to class until half an hour late—can I come by your office hours?).

Did America Enjoy a "Trente Glorieuses"?

One recurrent point of reference in Thomas Piketty's fascinating Capital in the 21st Century is the "trente glorieuses," the  30 years between 1945 and 1975 when the French, to their own astonishment and that of everyone else, somehow restored, nay created for the first time, their functioning first-world economy.  Piketty treats it as a defining event in modern French life and I am in no position to gainsay him.  But then he says:

In North America, there is no nostalgia for the postwar period, quite simply because the Trente Glorieuses never existed there: per capita output grew at roughly the sme rate of 1,5-2 percent per year throughout the period 1820-2012.

Um.  Well, I'm not disposed to dispute him on data; let's assume he is right that growth in the US has been slow but steady since before forever.  But I'm not at all sure this is the only index upon which gloriousness may arise.   Employment, plus employment security, for example.  I think I've said before (too often?) that the period 1947-1973 in America counts as just about the only time in any country where a person of ordinary ability (I'm talking to you, little Homer Simpson) could hold down a job that would support a non-working spouse and 2.3 kids in a suburban ranch-style home with at least one car in the garage.  Call it vingt-six glorieuses, at least within its narrow limits.

I mean this, I should stress, as only a minor point: Piketty's is a fascinating account which I am taking deliberately at a slow pace, the better to assimilate its charms--a bit like one of those classic novels he likes so much to cite.  Minor, but still a point, and perhaps a caution that he still perhaps knows more about France than he does about the United States.

Fama and the Other Fama

Friendly note to all the good folks frothing at the mouth over the idea of a "Nobel" Prize for Eugene Fama: you're right.  "Markets are never wrong" Fama aka "government is never right" Fama; "I don't understand bubbles" Fama, aka "there re no bubbles" Fama--that guy deserves a "Nobel" (even a faux Nobel) about as much as Isaac Newton deserved a prize for his alchemy.

But even a blind hog finds a few acorns and really good scientists believe a lot of nutty things.  To gain perspective, I'd urge that we take a few moments to remember what markets were like back before, say, 1965--back in the age of fixed commissions, before Charles Schwab, when we really believed Your Broker was Your Friend.  And when the broker, for his part, could make a high income and a low golf handicap from saying "Oh Buce, I wouldn't sell my Penn Central."  Back, that is, when we thought that even not-very bright people with lots of Aqua Velva in the Anglican Church vestry could make a money by picking stocks.  Back, that is, before the other Eugene Fama--the young insurgent Eugene Fama--kicked the pins out of an entire  industry whose presuppositions, as it now appeared, where about as relevant as the reading of sheep's entrails.

The trouble is that there are two Famas: manic, loony, ideological Fama as set forth above and the younger, soberer twin.  The latter doesn't know anything about how markets move and takes pride in his ignorance. The former knows (or knew): look, investing is insanely competitive.  At its best it takes extraordinary skill and hard work (not to say luck) and if you go into it expecting to get fat, you are more than likely to wind up on the menu.  In short, that trying to outguess the market is like playing Russian roulette with five bullets in the magazine.

Granted, there are still plenty of hawkers investment advisers ready to say "oh Buce, I wouldn't do that"--and plenty of customers, poor souls, who are ready to listen.   But these days, the advisers know that most investors will laugh in his face.  We see things differently now.  Trying to see them the way we did before Fama (and, to be complete, Harry Markowitz) is pretty much like trying to remember what life was like before Copernicus.

Two Famas: it's a distinction worth keeping in mind.  William Shockley got the (real) Nobel for inventing the transistor.  He spent his sunset years trying to persuade his fellow laureates to pack their sperm into little bottles.  We honor the one and laugh off the other.  We could treat Fama the same way.

Irwin's Alchemists

I've finally made my way through Neil Irwin's The Alchemists, and it's been a worthwhile trip. Well: it's been a long slog actually, but that remark isn't nearly as negative as it may sound. In many ways it's a very good book, sometimes spectacularly good. And while it has its limitations, I have to admit I'd be hard put to know how to make it much better.

Anybody who reads this far will already know the terms of engagement: Irwin proposes to bring us up to date on three central bankers: Ben Bernanke (of course); Jean-Claude Trichet, president of the European Central Bank from 2003 to 2011; and Mervin King, governor of the Bank of England from 2003 to just this year. In short, the three most powerful voices in banking during the late uproar (for extra credit: who is the Ben Bernanke of China?).

It's a promising framework and it almost works, with the qualification that the institutional limits on Trichet were strong enough that it makes him hard to compare. And like it or not—the Brits will not like it—the hard fact is that Britain comes across as a second-tier player, mostly mired in its own problems, sometimes buffeted by its larger neighbors.

There's an additional problem that I will specify in the moment, but first the good stuff: Within the limits of the engagement, Irwin has done a splendid job of marshaling and presenting so much abstruse material. Clearly, his time out at Columbia Business School served him well: he's got a (seemingly) easy mastery of arcanae of central banking, with a good teacher's knack for making the tough stuff accessible. If nothing else, you could do worse than pull this one down whenever you need to pretend that you understand the virtues and limitations of, say, inflation targeting or the twist. [Just as an aside: would I be right that financial journalism has improved markedly since 2008? Back in the old days, we had Greg Ip: now we have half dozen or more first-stringers who can go pretty much toe to with their sources. Brad DeLong likes to ask why we can't have a better press core. I wonder if maybe we have one).,

There's a limitation, as I've already suggested, in that the three stories are not quite comparable: even though they overlap, each faced his own issues with his own tools and institutional limitations. A bigger problem is the focus on central banking. For good or ill, the point (which the book makes abundantly clear) is that central banking could serve at best as only part of the solution. If you're an American reader, you probably already understand that; you whatever fiscal policy emerged in Washington between 2008 and today was a joint effort of the Fed and Treasury. You can't really blame Irwin for not telling the whole story—his book would have been twice as long and many times as unwieldy had he tried—but you really are getting only part of the picture without it. The European situation is even stranger, what with its multiple sovereignties and its single currency. I don't feel I have much of a handle on it, but my consolation is I really don't think anybody else does either. The British experience is simpler, but perhaps starker. King seems to have been unconstrained about dipping his finger into the political pot (you get the impression that Irwin really doesn't like King very much). British leaders do seem to have made some catastrophically bad decisions lately, but for the most part, hey, it's only Britain and how much can it matter?

In short, I'm just as glad Irwin didn't try to tell us "the full story.” But if we want “the full story,” we'd better have read—or be prepared to read—somebody else.

A difficulty, less important than the others, but it may account for my feelings of slog. Irwin shares a vice with a number of journalists-turned-bookies, and that is: the closer you get to the present, the more you feel like you are reading the pages of his notebook, the less you get by way of sustained analysis. At times, I found myself remembering what Dr. Johnson said about Paradise Lost. On the other hand, I'm glad I read that one, too.

Loose Change on Human Capital

I've been reading a bit lately on the post-Civil War settlement and in particular, the question of how to redeploy the former slaves, now citizens, in control of their own (as we might have said) labor power.  In particular, about the celebrated mantra of "40 acres and a mule"--give 'em land, let 'em work it for themselves and stay out of their way.  

I've always had the vague sense that 40-acres was supposed to be undoable and last night I got to wondering--was it undoable?  What did it require?

For an answer, consider: there were something like 4 million slaves liberated by the war.  As a wild stab, let's figure five people per family.  So, 800,000 families.  Ill spare you the pencil work but this translates into land about equal to the state of Mississippi.  This would include, of course, the rich bottomland of the delta.  But it would also include the scrub in the Faulkner country up north, which is hardly worth anything to anybody.  So, throw in a second state.  Throw in Louisiana.  More scrub and more delta.

So, doable.  Didn't happen, of course.  My own take is that it was that ol' darlin' Andrew Johnson who made it his business to assure that no freed slave got anything except his freedom and sometimes maybe the pants he stood up in.  And FWIW, I'll bet he thought that free-the-slaves stuff was a dreadful mistake.

Fun to speculate on what the world might have looked like if he hadn't got in the way.

The WinCo Demographic

I don't think we are part of the target audience but Mrs. B is a careful manager and take my word for it: WinCo actually has a lot of perfectly decent stuff at attractive prices.  Perhaps more intriguing is how little the crowed here resembles the folks at Wal-Mart just down the road.  Not nearly as many tattoos nor as much flab.  This is clearly a downmarket cohort, but they look mostly like serious people striving to make a go of a limited budget.  And, sad to say, not a lot of happy faces.  Particularly among the older portion of the human inventory: lots of  them grey and impassive, as if just getting through the day was a challenge in its own right.

The only discordant note: the array of cheap tschatschkes arrayed in the entryway, like prizes at the shooting gallery at the county fair.  Got to keep the kids mollified somehow, I guess.

The Tesla Ban: Markets for Thee, not for Me

Much good fun this week over the efforts by the North Carolina legislature to make life difficult for Tesla --thereby, as everybody except the participants appears to agree, insulating a favored constituency from the depredations of the free market.  I do not dissent but would this be as good a time as any to keep in mind that there has never, ever, been a truly principled devotee of free markets in any position of power in any sovereignty anywhere?  Folks like Luis Zingales and William Baumol may sketch entrancing models of free market paradise but Albert O. Hirschman (discussing economic growth) long ago articulated the paradox of perfect competition:

[S]ociety a a whole produces  comfortable and perhaps steadily increasing surplus, but every individual firm considered in isolating is barely getting by, so that a single false step will be its undoing.  As a result, everyone is constantly made to perform at the top of his form and society as a whole operates on its--forever expanding-- "production frontier," with economically useful resources fully occupied.

...the image, as Hirschman drily puts it, "of a relentlessly taut economy."  As someone somewhere put it, simply, the last thing you want in the world is a job where you get paid what you're worth--a job, that is, where marginal revenue=marginal cost, and where marginal cost=average cost.  Granted that there are visionaries who may be able to conjure up the image of such a society (usually from a cosseted hidey hole like a university professorship).    But these are few enough to begin with and if by accident they get a transitory grip on the levers of power they pretty quickly learn to unlearn their principled purity and to identify--often with total sincerity--their favorites who deserve protection.

Best Thing I've Read All Week: Steve Randy Waldman on the Resource Curse

If you've missed it, stop reading here right  now and pop over to Interfluidity and read up on the new, pervasive, worldwide "resource curse" as understood and explained by the ever-provocative Steve Randy Waldman.  Takeaway:

Clucking about places like Nigeria is almost a reflex, a familiar tic among Western economists. But meanwhile, we’ve hardly noticed that technological and international supply-chain developments have snuck the resource curse in through our own back doors. In aggregate, the goods and services we require have grown ever more tradable, and production has grown ever more amenable to control by relatively small groups of people. There’s a sense in which we are all Nigerians now.

Repeat--link.  There's some good stuff in the comment thread also, though predictably not always easy suss out.  For background reading, you could go also to The Economist's briefer on "generation jobless," as in: youth unemployment is not just your harebrained nephew, it is a world-wide pandemic [I think I was struggling for the same point in my winsome and artless way a few days ago myself].

And for a generalized proto- crypto- neo- Marxist spin, go here.  No, wait, really.  I understand what you're saying: the very name of Jameson is usually as effective a soporific as a cosh at the back of the skull, but this guy draws a straightforward and thought-provoking inference.

Nerd Sweepstakes: We Have a Winner!

There's an episode of Cheers where the entertainment at the accountant's party is the guy who can recite all the telephone area codes.  I think he loses the nerd sweepstakes to this guy at the Berkeley economics and annual skit party, with charity auction add-on:

Professor Gorodnichenko (who also swept the awards ceremony tonight, winning the Best Professor and Best Adviser awards) donated another auction item-- a check with the amount drawn from a beta distribution with parameters alpha=3 and beta=2, multiplied by $100. The beta distribution is only nonzero on the unit interval, so the check will have value between $0 and $100. The mean of the beta distribution is alpha/(alpha+beta), so the expected value should be $100 (3/5)=$60. The item went for $50 -- so everyone in the audience must have been risk averse, loss averse, financially illiterate, or liquidity constrained (or some combination, like me.)

 Link. That would be Yuriy Gorodnichenko, and he is apparently all in at this game: he also offered to stump up $500 "if Christina Romer or Janet Yellen becomes Fed chair at any time in the future."  Any time?

Gary Gorton's Missed Opportunity

In Misunderstanding Financial Crises, Gary Gorton has such an important point to make that it is a shame he sat on the execution.

The one-line takeaway is, as I take it, that we don't pay nearly enough attention to the concept of "financial crisis"--by which he means, I think, crisis narrowly defined like the mensis horribilia when Lehman went down--also Fannie and Freddie, WaMu, Merrill Lynch and the reputation for invulnerability of the American banking system.

I think that much is inarguable, although there may be some issues about cause and definition.  Gorton says it is because economists are too analytical. not willing to  grant history the respect it deserves.  I think there is a core of truth here but I suspect his own analytical focus wobbles a bit when he concedes implicitly that actually we do pay attention to history--we just don't go back far enough.  That is: almost any consideration of slumps and booms, shocks and suchlike, confines itself to what he calls "the quiet period"--1934-2007, during which there was not a single disruption in the system (October 1987 and Long Term Capital Management would not count as exceptions, I suppose ironically because they ended so quickly and  painlessly).  

We can see at least two errors at work here.  One, we assumed that because we had escaped for 73 years, we seem to have figured there must have been some fundamental change in the system that made us invulnerable to dislocation--the "great moderation," or whatever.  And two, we failed to notice that even in "the quiet period," shocks continued to occur--it was just that they occurred in Mexico or Argentina or Thailand or Russia or (again) whatever.  Apparently we blew them off either because we weren't paying attention or because we didn't think they had anything to do with us.

Well, time for a rethink. And here is where Gorton has done some important work.  His Slapped by the Invisible Hand demonstrated how the critical events of aught eight could be understood as an old-fashioned bank run in new garments.  Slapped was brief, crisp, elegant, and squarely on point, or so it seemed.  It invited generalization.    That is what Misunderstanding purports to offer, but aside from remaking the core points of Slapped, there is surprisingly little that's new.


Gorton does offer up a sort of history of previous crises.  But it's perfunctory, amateurish--mostly just rip-and-read quotations from old court cases.  Unless I missed something, he seems not even to specify precisely why,  he is replowing the old ground although I guess I can surmise a good reason: he wants to say "hey guys, you see what happened before?  Well it happened again--and can be expected to happen yet again, quiet period notwithstanding."
  
I'll grant that this is a point worth making, even if somewhat slapdashingly presented.   But convinced as we may be (and my guess is that most readers were probably convinced before they open the book), there remains the larger question--okay, so?  We've seen that they happen, you've persuaded us (more or less) that they'll happen again.  Giving credit where credit is due, you've even shown how sometimes the great and good have handled them right.  So what do we do now to get our thinking back on track?



It is perhaps one of the lesser disappointments of this book that Gorton hasn't disposed of all the questions on the agenda he presumes to create.  Setting the agenda is an achievement in itself and it is probably asking too much to expect him to flesh out a fullscale response.  Still, I suspect he might have stood a better chance of getting everybody's attention if he had done a more polished job of laying it out.

Appreciation: Adair Turner

Adair Turner's Economics after the Crisis is the kind of book you would want to be read by--well, by the kind of person who would not read this kind of book.   It's a succinct and elegant sketch of (a) a better world (heh); and (b) a better banking system, with a few added comments about heading off climate change.

Also, to be candid, an imperfect book.  It starts off strong, as much a delight to read as I've picked up his year.  Here, Turner offers a sketch of  conventional wisdom among the great and good.  He argues that they agree that (a)  the best thing a politician can do is to increase "wealth," perhaps in the form of gross domestic product; and (b) the best way to achieve (a) is to let the free market lion roar.  Oh, and (c) yes, income disparities will widen but you know what they say about omelets and eggs.

Turner is elegant and direct on (a).  Grant that if you are a begrimed Indian peasant dreaming that someday you might own a bullock cart, then any extra cash, however trifling, is bound to come as a boon.  But if you are at or around (just say) the current U.S. level, it is not at all obvious that an extra dollar will make you any happier--or, if it does, that the marginal accrual of happiness will be sufficient to outweigh the opportunity cost.

And turn to equality.  Here, for one, there is some reason to believe that the richest among us are not the happiest: there seems to be a lot of status anxiety in the Upper East Side and the Hamptons; enough to make you wonder whether it is really worth their while to strive for so much (Turner doesn't mention it, but my guess is this might be a generational new-money thing.  Most of the hateful ones have way more money than their parents--how could they not?  And there is a lot of evidence that upward mobility causes at least as much insecurity as the reverse).  Moreover there is good evidence that extremes of inequality in a society inflict social damage all the way down the line--for example, in solidarity and trust.

And as to the market--ah,  here, Turner gets  bit less steady.  He declares himself a committed free-market sort of guy (certainly when it comes to restaurants, as he mentions more than once).  But as to banking.  Hm.  I suspect maybe the trouble is that virtually all of  us except the banksters believe that cancerous, metastasized modern banking sucks wealth out of society.   The trouble is I don't know of anybody (not Adair) who can make a comprehensive case that this proposition is true.  He's pretty much reduced to saying thanking doesn't seem to do the job of (e.g.) allocating capital that it promises to do.   And that life seems to have been better (and banksters less of a nuisance) when  banking comprised a smaller chunk of the GDP.

Finally on regulation--I'd say that turner is noncontroversial but rather thin.  He wants s regulation that is stsble, steady, and that itself does not make the problem worse.  Well yes, but it's pretty thin soup.

Turner fleshes this brief book out with a few observations on climate change. I guess I can see why: he is a major player in Britain's climate change debate.  Also, perhaps, he simply had run out of other things to say.  There's nothing really to quarrel with here but it doesn't do much to improve the structure of the book as a whole.

On rereading, this note seems snide and dismissive.  Which is odd because I genuinely enjoyed the book and I think ratio of raw truth to dead trees (it's short) is about as high as you're likely to get.  Give it to your irritating uncle and tell him not to bother you until he's finished reading it.  That ought to keep him out of your hair for a while.

Two Artless Queries about the Zero Bound

Paul Krugman's "The Price is Wrong" is about as succinct an explanation as you are likely to get of his position of whether/why to stick with a policy of loose money and unbalanced budgets.  The analysis pretty much makes sense to me although I'm not nearly skilled enough to judge the empirical evidence in any detail.  I do at  least acknowledge that Krugman seems to be winning on points, insofar as the threatened boogieman inflation persists in snoozing placidly under the bed rather than  lurching randomly round the boudoir  and upending  all the furniture.

But two unrelated questions continue to nag at me.  One, the "zero bound" discussion rests on the premise that the nominal rate cannot go below zero (yes?).   But it does go below zero (yes?) even in ordinary times in,, e.g., any checking account that imposes a fee for holding the deposit?  An objector might say that this isn't price-of-money, it's a service/convenience charge.  I'm not persuaded that there is a difference, particularly given that economists are (so far as I can tell) generally a little shaky on explaining just what we are paying for when we pay  price for money.*

Anyway, I find it hard/impossible to believe that all depositors/investors are deceived by the positive-nominal, negative-real fandango.  At least some of that money must be coming from investors who know perfectly well that they are getting a negative return but figure they might as well suck it up and soger on anyway.  

Which bring me to my second question--the topic is the idea  that a little inflation might be a good thing insofar as it drives down real wages.  Apparently this notion has been part of the argument from the beginning: I recall reading it in a letter from John Maynard Keynes, quoted, I believe, in a book by Bruce Bartlett.  As an empirical proposition this may very well be true (why, for comparison, do consumers persist in carrying credit card debt at astronomical rates when they often have other and better choices?).  Yet isn't it strange to construct an economic policy program that only works if the consumer does not understand what is good for her?

[Note: Revised, to take account of some second thoughts and a bit of Larry's commentary, infra.  But basically impenitent.]

*My Uncle Evert used to say he left his money in his copy of Dante's Inferno, so when he asked himself "now where in hell did I leave my money?" he would know where to start looking.  Cypriots may feel the need to resuscitate and refashion this joke.  BTW in a digital, does anybody but me find it intriguing that the Brits are freighting actual pound notes into Cyprus to solace the troops?   I suppose if they simply dropped them from helicopters they might solve the whole problem.  

Stuff

I've been reading a fair amount of midcentury history lately--the depression, war, postwar, that sort of thing--and what I can't get over is the amazing amount of stuff we used to make in those days.  First cars, and highways to run them on.   In the depression dams, and public buildings. In my youth I knew an old guy who remembered his time on the Hoover Dam the way others would remember their time at Guadalcanal.  I had a law clerk once who said that when the next great earthquake arrived he wanted to be inside the LA federal courthouse because he figured anything built by the on cost-plus could withstand anything.

And then the war: rifles of course, and uniforms, but that was barely the beginning: whole buzzing storms of fighter planes, flotillas of carriers to deliver them, hordes of high-flying bombers to glower over them all.  And not  just built them: built them knowing they would be destroyed, shot out of the sky, sent off to the bottom of the briney deep, we well knowing that we would and could and did build them all again.  We seemed to have no end of metal to bash into things, or oil with which to feed them.

And then after the wars the cars.  And the superhighways.  And the washing machines: I got an early break in the newspaper biz when a somewhat less than sober young engineer catalogued for me the defects in the 1962 GEs.

All of which implies the labor: the armies of workers marching through the door in Fritz Lang's Metropolis. And the strikes: another thing we tend to forget were how violent or disruptive were the near numberless labor-management conflicts of those days.   It was mostly a guy thing, something you did with you buds (inadequate word: Aussie "mates" is much more to the point) before you went off  hunting together.

I don't mean to go overboard on the nostalgia here.  It was pretty awful, the way we ripped through the planet and through each other.  It was also a way of life, the only one we knew.  One may speculate on the etenet to which it was hard-wired.  But we've still got a (dying) generation who cannot imagine it any other way.  And their children and grandchildren who have not yet invented one. 

Somebody Help Me Here: Contracting Out

Should the Treasury Department run its own cafeteria?  Was it stupid of Henry Ford to run a limestone quarry?  What, if anything, is so all-fired wrong about putting a prison in the private sector?  Or if it is wrong for the prison, is it also wrong for the hospital?  Should I care that or Hewlett Packard operate as centers of a force field of production and invoice? Should I rue the day when the draft gave way to the all-volunteer army?

DamifIknow, and that's the point. There is a common thread through this stuff and I pull on it, and it snags.  In short, I don't get contracting out.  I get the basics.  I've read Coase:  I know it is all about cost-reduction: we (should?) organize and manage when it is cheaper than buying on the market; if not, not.

I also know (snark alert) what bureaucrats are, habitually: they're lazy and self-absorbed, bent on protecting their turf and aggrandizing their domaine.  Of course I also (more snark) know that private providers are chiselers and wheedlers who care nothing about the product and everything about the bottom line.  I also know that it's a matter of comparative advantage: we should do what we do best and buy what the other guy does better.  

I guess I know that it comes down to comparative advantage: we should do what we do better than anybody else, and buy the rest.  Treasury should not run a cafeteria.  Henry Ford probably was wrong to run a limestone quarry but it's probably not wise to second-guess Henry on matters of organization and efficiency.    Still-- a while back I read Gerald Davis provocative Managed by the Markets (perhaps it was he who got me started on this wheeze).  I got the sense that Davis feels (he didn't quite spell it out) that all this contracting-out stuff bespeaks a calamitous, perhaps even a tragic, departure in our society: that we have lost some essence at the core of our being (Gerald, if you are out there, I apologize for this flight of fancy).

Go back to Milton Friedman, who saw compulsory military service as akin to slavery.  Set him up for a face-off with Jean-Jacques Rousseau, who thought we ought to see military service as a kind of privilege--not just privileged access to pay and bennies, but a privilege in the sense of a chance to participate as a full member of society.    Is this, by the way, why gays battle (heh!) for the right to join the military, why women show so much eagerness to make it to the front lines?   Is this something that Friedman the free market ideologue missed, or something that Friedman the master polemicist seems simply chose to ignore?  Maybe I'm just being coy here: surely we can observe millions who would regard compulsory of service as an infringement on their freedom, yet who regard loyalty, community, yes (ack) patriotism as essential to their being.  Are they simply confused, or am I missing something?   Turned round, how can any libertarian be a patriot?  If we make the state so small as to drown in the bathtub, what is there to be patriotic about?

The army may be a high-salience instance but Davis, if I read him right, seems to feel somewhat the same way about Hewlett-Packard or Nike--that there has to be more to life than just putting your brand on an athletic shoe or, come to that, on a stadium.  I bet I know what he thinks about private prisons.  I wonder what he thinks about the all-volunteer army.   As I write, it's dawning on me that there is probably a whole literature out there, just something that hasn't come my way. Anybody want to tell me where to start?

Defining Deviance Down

Thanks to Elizabeth for the catch of (my) day: private prison as stadium sponsor-- the GEO Group stumps up for a new stadium at Florida Atlantic University.  You know about Florida Atlantic?  It's a public (state) university built on land seized from Japanese farmers at the beginning of World War II; its first degree was an honorary doctorate to Lyndon Johnson. You know about  GEO?  It's the nation's second largest provider of private prison services, with headquarters more or less cheek by jowl with Florida Atlantic in Boca Raton.

Huffpost, where I'm reading the story, feigns bewilderment: Stadium sponsorships usually involve a product that a company wants to market to consumers. But:

GEO Group's customers are government agencies offering contracts. Prisoners don't have a choice of where they land behind bars. "It appears to be a charitable gift that is trying to be a marketing vehicle, and it just doesn't make a lot of sense," said Paul Swangard, managing director of the Warsaw Sports Marketing Center at the University of Oregon's business school. "To link themselves with an athletic department when their business is locking people up, it just doesn't connect to me really well."

 Okay, plenty of corporate donations can count as "marketing," narrowly defined.  And plenty of others qualify as a thinly-veneered indulgence of the CEO's private whim: a gallery for an artist specially favored by his wife, for example.  Or maybe a mix: a stadium that just might please the fans but will certainly give the CEO dibs on a skybox.  

I can believe that GEO's "gift" involves some such mix of motives. But there's more: I suspect you could read this as one (more) ploy by the prison to detox the prison industry; to make its business just as anodyne as the marketing of hairpins or chewing gum.  The one thing we can be sure: it has nothing to do with "charity."  Which is just as it should be: let management start actuallygiving money away for on a motive of disinterestedness, and the shareholders will be all over them like a cheap prison tattoo.

More on the Holland Principle

You'll Remember the Holland Principle--the one about the govt as an insurance company with the army, or perhaps the other way round.  I had traced it back to a (ref to) an article by a certain Michael Holland, along about 2003.  Paul Krugman, most often cited as the source (but who disavows original authorship) weighed in with customary celerity:

Someone should have asked me. Peter Fisher, undersecretary of the Treasury, in 2002. 

But follow the comments after Krugman's remark and you'll find that he seems to have repeated in 2001 something he didn't hear until a year later--a chronology which seems to invite further inquiry.  Down at comment #22 in the same thread, Holland weighs in:

This is Holland. The quip is one I used in a talk explaining the federal budgeting process to academics on the six federal advisory committees for the Department of Energy's Office of Science.

Since science policy and domestic finance policy circles don't overlap, I wouldn't have heard it from Peter Fisher. He wouldn't have heard it from me. 

So, simultaneous discovery, like Leibniz/Newton or Jevons/Walras/Menger.   In a separate email, Holland elaborates:

I started off as a program examiner at OMB in 1999.  I used to get invited to give talks to the Department of Energy Office of Science advisory committees (e.g., High Energy Physics Advisory Panel, Nuclear Science Advisory Panel, etc.) explaining how the R and D budgets were formulated.  You’ve got to do something to make budget talks amusing, thus the quip.  ...

I do remember seeing the quote attributed to a Bush Administration Treasury official several years after I had been using it, so I don’t doubt Krugman’s attribution to Peter Fisher.  I can’t imagine the quote is original to either of us.  Just stare at a pie chart of the federal budget long enough.I did get called on the carpet by OSTP’s Chief of Staff when my quote appeared in Science. Non-political staff in Executive Office agencies are not supposed get themselves quoted in the press – even inadvertently. 

And in another, Holland adds:

Some quips must have their own motive force and regenerate themselves with some frequency.

And finally:

A 40 min talk on physics and the budget process demands a joke. I only had one. I still only have one.

 Okay, but I'd say he has two.

'

New Year's Greeting: Ms. Found Under a Latte

Found at the stand-up bar in a neighboring chain coffee shop, evidently left behind by the hairy guy with the rank odor who just shuffled dejectedly out the door:

Welcome back to the world of the living. I hope you enjoyed your nap.  A lot has happened since you fell asleep in your cave in 1972. Let me see if I can bring you up to date:

1. Family income has been more or less flat since 1980. Quality and quantity of male employment has fallen.  Women have taken a larger role in the market workforce, although still stuck with more than their share of household chores.
2. We talk about the change as a decline in manufacturing but it isn't; we still manufacture a lot but we do it with fewer and fewer employees. In an earlier time we talked about automation; today we talk about robotics but whatever; the fact is that the phase that ended around 1980 was probably the last in human history during which a guy with the skills and training of a Homer Simpson could make enough to support a non-working wife and three kids with a nice house and a car in the garage.
3. We did have an employment/wealth boom of sorts in the 90s, but it was almost entirely restricted to five counties: Manhattan; Seattle, San-Francisco-San-Mateo-Santa-Clara We had another boom in the aughts but it was entirely illusionary, as people survived a declines in employment and income by drawing “wealth” out of their homes.
4. Otherwise, we've become a service economy where people, if the work at all, hold relatively low-paying jobs scanning barcodes, answering phone calls or emptying bedpans.
5. We still talk about the return of a manufacturing golden age but it's beginning to dawn on us that those jobs are never coming back. We've learned to make more and more with less and less to a point where we simply don't need armies of workers. And just in passing: it's not that all the jobs have gone to China, or wherever: jobs did go overseas, but our competitors have found that the same forces are constricting opportunities for them as well.
6. By the way, did I mention that we are mostly living longer and looking forward to a funded retirement? And that the oceans are rising and we are running out of fuel? 

 ...

1. When we talk about how we might face this problem, we talk about the need for “more education.” What do we mean when we talk about “more education,” what can we mean? [but from here on, the manuscript is obscured by the stains of a pumpkin latte. Scientists at the Institute for Coffee Stain Removal are on the case, and we may be able to provide more content later.]

Lind on the Roots of the New Deal

One thing conservatives know about the Franklin D. Roosevelt is that he pinched the idea for the New Deal from the fascist Mussolini (snark).   If they care to nuance that idea, they might want to take a look at Michael Lind's informal, readable and instructive Land of Promise: An Economic History of the United States.  No secret that Lind embraces a kind of Hamiltonian vision of good government.  No surprise that he is fascinated by the numerous episodes in our history of assertive central-government economic policy.  One of which would be the National Industrial Recovery Act (NIRA, later NRA), the centerpiece of Roosevelt's first term.  In general, Lind gives the NRA better grades than it gets from so many historians these days.  And on sources, Lind is unequivocal:

[T]he actual origins of the NIRA lay in the Wilson administration, not the Mussolini regime. The NIRA revived the WIB [War Industries Board--ed.] of World War I under a new name. The trade associations that were supposed to write industry-wide codes under government supervision were a version of the commodity sections and war-service committees of the WIB. The denial of the Blue Eagle emblem to uncooperative firms was merely a revival of the technique of shaming companies into compliance that had been used by the WIB during World War I. Hugh Johnson   was the former deputy of Bernard Baruch at the WIB.

And not just the WIB.  Lind identifies a source even closer to the Depression and the New Deal--Herbert Hoover, Roosevelt's predecessor in the White House, but the bearer of a luminous record in the field of activist public policy, including sponsorship of a "collaborative" approach to industrial management.  Lind quotes the economist Henry Simon: "The N.R.A. ... is merely Mr. Hoover’s trust policy and wage policy writ large."  And New Dealer Rexford Guy Tugwell: "We didn’t admit it at the time, but practically the whole New Deal was extrapolated from programs that Hoover started.” 

If there is a second thing conservatives know about Roosevelt's NRA it is that it was a failure.  Here they share common ground with a lot of other observers.  Lind isn't so sure.  He argues that much of the NRA wound up assimilated into other law under other names. But he does offer a more delicate spin on the whole project, drawing on a contemporaneous criticism uttered by John Maynard Keynes.  Keynes suggested that the NRA was a good idea by way of long-term reform, not so good for curing the immediate problem at hand (Keynes would have preferred more aggressive public spending, an agenda that Roosevelt seems always to have found distasteful).  Lind concludes, "in hindsight, Keynes was right that the NIRA was a measure of long-term reform that distracted the energy and attention of the Roosevelt administration and Congress from more urgent recovery measures.




Sources:; Michael Lind (2012-04-17). Land of Promise: An Economic History of the United States Harper. Kindle Edition. 

Gintis Gets Back to First Principles

In a book review, Herb Gintis offers an introduction to the modern state:

The "welfare state" that ruins our lives is the modern state that has virtually unlimited power to deliver goods and services outside the market framework, financed by the state's power of taxation. The book [under review] makes three major arguments. First, the state does not deliver services that are in the general public interest, but rather supplies perks to special interest groups and places the burden of financing these perks on others, especially the general taxpayer. Second, taxpayers are not willing to fund these rent-seeking activities, so the state finances its expenditures by borrowing. Third, the build-up of burdensome levels of debt will eventually bankrupt the welfare state.

The first two arguments are correct, but are characteristics of the state in general, not in particular the "welfare state." States, going back to the the thirteenth century, have always delivered perks to favored groups and forced others to foot the bill. And taxpayers have always resisted payment, forcing states to borrow to finance their follies.

The third assertion is probably false. When debt reaches burdensome levels, states usually either inflate their currencies to devalue the debt, or they simply default. Both have negative effects of public welfare and economic growth.

The implicit assumption is that the state is simply a predator, and we can easily limit its activity to protecting private property and supplying essential services. This assumption has not basis in fact. States are tolerated and promoted by voters and citizens because it supplies services that are not properly supplied by the market. There is no advanced society without a very strong interventionist state, and I am certain there will never be one. Standard public economic theory explains why a large, interventionist state is an essential part of economic development. I outline this theory on my web site, under "You Must Read This!", in a short paper entitled "A Brief Introduction to the Theory of Welfare-Improving State."  [Link--ed]

The state, like the market, is subject to corruption, and it is the citizens' task to keep both in line and serving the public interest. ...

 Link.