June 13, 2012

Lost Knowledge

The flower of civilization sits on a thin stem.  Take away the knowledge of the scientists, engineers, and the practical people who produce and transport food and manufactures, and the globe could support no more than a few hundred million people, to say nothing of the achievements of culture that employ most of us.  All the bankers, talk show hosts and personal trainers in the world could not keep a city of even a million people going for even a few days without the backbone of knowledge that keeps the factories and the trains moving.  That is why attacks on science – both as a set of hypotheses supported by evidence and as a method of evaluating hypotheses – pose such an existential threat to life as we know it. 

Some attacks on scientific knowledge simply play out the long tail of ignorance that resists any new idea.  Denials of the theory of evolution or of climate change are examples of rearguard actions by people who are blinded by some mixture of stupidity and unshakable prior faith.  In a few decades, one can reasonably hope, these deniers will be no more influential than those who continue to argue that microorganisms do not cause disease, or that the earth is the center of the solar system.

Scarier is the reappearance of ignorance that we thought was behind us.  If we needed to rediscover the corpus of human knowledge every century, civilization never would get anywhere.  That is why the current fight over macroeconomics is particularly scary.   Not that macroeconomics is a science like astronomy or biology.  But good economics uses scientific method to infer and test hypotheses about how the world works.  All other economics is essentially BS, opinion balloons released from the same flat earth, catching attention and then floating away.

Eighty years ago, in the midst of the Great Depression, economists (notably, of course, Keynes) called attention to some accounting identities: what people earn is equal to what others spend; the global sum of all net saving equals the sum of all net investment.  These identities are true by definition.  The theory of macroeconomics concerns the problem of satisfying these identities while at the same time generating the production, income , and trade that the system is capable of, avoiding high unemployment (as occurred in the Great Depression) or rampant inflation (as occurs from time to time in various countries).

The identities at the core of macroeconomics, and the problems that occur when the sums of planned spending or of planned saving and planned investment do not add up to what the economy is capable of, are universal.  The idea that government should actively try to bring the system to its capacity is not universal.  Keynesian counter-cyclical policy is not an inevitable consequence of macroeconomic analysis.  But concern about the level of aggregate demand in this time of excessive unemployment is a direct consequences of macroeconomic analysis.

At one time (say the 1960s and 1970s), we knew this.  Today, we seem to have lost macroeconomics, not as a set of policy prescriptions but as a set of analytical questions. 

 What is the analytical foundation that underpins the pressure to promote austerity, to balance budgets in the short run?   I have looked for analysis and sytematic use of evidence,but I have found none. 

The closest one comes to analytical justifications for universal austerity is an appeal to group psychology.  “Uncertainty,” “confidence” – psychological perceptions that undoubtedly are important for individual decisions – often are evoked as the drivers of production and spending plans.  Public sector austerity and balanced budgets are defended as signals to the rest of the economy.  Factory owners and consumers are supposed to become optimistic in the face of public austerity, bringing their spending plans in line with the capacity of the economy.  This theory has never been rigorously tested, and the casual evidence of the last few years suggests, once again (we knew this in the days that macroeconomics aspired to scientific rigor), that the private economy does not self-correct quickly, even when governments behave like good little shop keepers.

Deniers of macroeconomics combine their fiscal policy prescription – that all governments should follow the budget and spending rules of good bourgeois household – with the idea that monetary expansion, anywhere and everywhere, poses the threat of imminent inflation and consequently it must be avoided, anywhere and everywhere.  Again, this is a belief that floats free of evidence.

We are repeating history because we do not understand it.  More troubling, our ignorance is willful.  There are no competing theories of macroeconomics, with researchers rushing to test the ideas against evidence.  Politician after politician is pursuing austerity because he knows it is the best thing to do. 

Even if creationists gained control of school systems, we might hope that some elite, people who actually work with breeding programs and genetics, could preserve what we know, could continue to advance technology and science.   Macroeconomic knowledge can be preserved by elites, but not used.  Macroeconomics has its effect when whole societies use it, through public policy.  If political leaders refuse to engage evidence and scientific process, we might as well never have come up with the knowledge.

October 12, 2011

Please Follow our renamed group blog: Blog of the Century

The Century Foundation has renamed the group blog from Taking Note to Blog of the Century.

Find us at: http:// botc.tcf.org

September 13, 2011

Graph of the Day: Poverty on the Rise in America

According to new data released today by the Census Bureau, the percentage of Americans living in poverty rose to 15.1 percent last year, the highest level of poverty since 1993. In 2010 A record 46.2 million people were below the poverty line, defined as income less than $22,314 a year for a family of four and $11,139 for individuals. It was the fourth consecutive year that the number of people in poverty has increased in America. Real median household income fell 2.3 percent to $49,445—lower than it was in 1997 and barely a 25 percent improvement since the 1960s.

Unsurprisingly, the Census data shows that the Great Recession only exacerbated longstanding economic disparities between geographic regions and racial categories. In 2010, the poverty rate varied significantly in the United States, with Blacks, Hispanics, and the southern states experiencing far greater economic hardship than Whites, Asians, and the northern states.

 

 

Percentage of americans poverty stateSource: US Census Bureau                    

The highest poverty rates in the nation belonged to Mississippi, Louisiana, and Washington, D.C.—each with approximately one out of every five people living in poverty—while New Hampshire enjoyed the lowest rate, with just 6.6 percent below the poverty line.        

Americans in poverty by raceSource: US Census Bureau                

The 2010 Census data also confirmed that economic inequality between racial groups in the United States remains a major obstacle to social justice, with the poverty rate for Blacks nearly three times that of Whites. While poverty rates increased across the board, the setback was particularly dramatic for Blacks and Hispanics, erasing several years of economic gains.

View more from the Graph of the Day Series.

September 09, 2011

Capital punishment and the mentally disabled

America has moved very far in embacing citizens who live with intellectual disabilities or with psychiatric disorders. One sign of progress has been the quiet change in our capital punishment system. The Supreme Court and most states have altered policies that have produced many unjust executions of individuals who committed serious crimes, but who were not fully responsible for their actions due to their disability.Pic2

Texas's appalling capital punishment system has been a real exception to this humane trend. My piece in the Nation provides more information. The first few paragraphs appear before the fold:

Taking note is now Blog of the Century: Continue Reading Harold's piece Here at http://botc.tcf.org and set your rss readers to that feed

September 06, 2011

Taking Note is Now: Blog of the Century

We've changed our name and address. However we are leaving our content accessable here at Taking Note.  As of Tuesday, September 6th, 2011 All new content is at our re-named, newly addressed:

Blog of the Century and can be found at  http://botc.tcf.org

September 01, 2011

Graph of the Day: Did Stimulus Money Hire the Unemployed?

According to a new research paper by economists Garett Jones and Daniel Rothschild, “Did Stimulus Dollars Hire the Unemployed?” published by the conservative Mercatus Center, less than half of all employees hired with American Recovery and Reinvestment Act funds actually came from the ranks of the unemployed. “Hiring isn’t the same as net job creation,” the report argues. “In our survey, just 42.1 percent of the workers hired at ARRA-receiving organizations … were unemployed at the time they were hired. More were hired directly from other organizations (47.3 percent of post-ARRA workers), while a handful came from school (6.5%) or from outside the labor force (4.1%) … This suggests just how hard it is for Keynesian job creation to work in a modern, expertise-based economy: even in a weak economy, organizations hired the employed about as often as the unemployed.”

Unsurprisingly, conservative economists like Tyler Cowen see Jones and Rothschild’s research as proof that the stimulus failed. “This paper goes a long way toward explaining why fiscal stimulus usually doesn’t have such a great ‘bang for the buck,’” writes Cowen on his blog Marginal Revolution. “It raises the question of whether as ‘twice as big’ [sic] stimulus really would have been enough.”

Sources of workers ARRA funded organizations

However, if you look more closely at the numbers, an alternative, more optimistic story about the ARRA emerges. First of all, for each of the 47.3 percent of workers who left their jobs for new, ARRA-subsidized positions, it is likely that another worker, potentially one who was previously unemployed, took their place. That means that job-shifters weren’t taking away opportunities from the unemployed; on the contrary, their stimulus-sponsored job mobility created a trickle-down effect, leading to new hiring at the businesses they left. Even if only half of these ‘second-order’ hires came from the ranks of the unemployed, that means that the true percentage of ARRA-subsidized jobs going to the unemployed is closer to 66 percent, not 42 percent.

Moreover, the report does not specifically detail how many people were able to keep their jobs thanks to ARRA funds. Even if no new jobs were created, a large amount of the stimulus money that went to the states enabled local governments to employ workers that would otherwise have been laid off. And in fact, Jones and Rothschild’s research indicates that the average organization receiving stimulus funds equal to 10 percent of its annual revenue reported retaining or hiring workers equal to 6 percent of its workforce. Which helps explain why, according to Recovery.gov, over 550,000 have been created or maintained by ARRA funds just between April and July of this year.

Of course, no one is claiming that the ARRA funds have been apportioned or managed perfectly —$787 billion is a lot of money. But considering the time constraints that the Obama administration was working under, it would be unreasonable to expect that such a massive economic stimulus could be implemented without some waste. That being said, the CBO estimates that, relative to what would have happened without the law, the ARRA raised real GDP by between 1.5 percent and 4.2 percent in 2010, and boosted employment by as much as 3.3 million. That may be the kind of recovery that Cowen dismisses as not much "bang for the buck," but I'd wager that the majority of the 14 million Americans who are currently unemployed would like to see more such stimulus, not less.

 

View more from the Graph of the Day Series.

Persistent Underemployment Expected for Nearly a Decade

Next week, President Obama will give a national address on job creation in the context of a sweeping jobs crisis. Without major initiatives by the federal government to put Americans back to work, we are looking at nearly a decade of persistent underemployment. The national unemployment rate has averaged 9.3% over the last year and has been stuck above 8% for the last two and a half years. (The broader underemployment rate, accounting for discouraged workers who have dropped out of the labor force and those working part time for economic reasons, has held over 15% for two and a half years.) Returning the unemployment rate to its pre-recession rate of 5.0% would require adding 11.1 million jobs, but monthly employment gains have averaged only 72,000 over the last three months (an annualized rate of 864,000 jobs). Meaningfully addressing the jobs crisis and lowering the unemployment rate requires significantly faster economic growth and employment gains than currently experienced or expected.

New projections from the Congressional Budget Office show that unemployment is projected to average 7.9% in 2014—seven years into this economic slump—and a return to full employment is not expected until 2017. Full employment is the level of employment consistent with stable price inflation and potential economic output (the economy is currently running $1 trillion (-6.3%) below potential economic output, largely because labor resources aren’t being employed), believed to be roughly 5.0% to 5.2% in the United States. Since the Great Depression, macroeconomic policy has generally targted full employment (the Federal Reserve's dual mandate is balancing maximum employment and price stability). A return to full employment in 2017 would come almost a decade after the recession began in December 2007 (as dated by the National Bureau of Economic Research). The recession is also dated as having ended in June 2009, although the past two years surely have not felt like a recovery for millions of households because of the ongoing jobs and foreclosure crises.

The expected return to full employment has been pushed back and CBO’s unemployment projections have been numerously revised upwards as the economic recovery has disappointed (see chart). In their January 2010 projections, CBO projected the unemployment rate would average 5.3% in 2014, meaning the economy would be approaching full employment. This forecast for 2014 was revised upwards to 6.8% in their January 2011 projections, more than a percentage point below their most recent August 2011 projections. With these revisions, the expected return to full employment has been pushed back roughly two years.

  Image001

These longer-term CBO projections assume that the economy gradually reverts to potential economic output beyond two years of real economic forecasts. We have seen near-term forecasts revised downward, and the subsequent reversion to potential output delayed. (It is also possible for potential GDP to revert toward actual GDP, and CBO’s revised budget and economic outlook notes that potential output over 2017-2021 has already been revised downward 2% as a result of the recession). Unless Congress passes a large jobs package putting millions of Americans back to work, it is all too possible that unemployment projections will continue to be revised upwards and the return to full employment will prove elusive for years to come.

This trend of disappointing growth and unfavorable revisions to economic forecasts could be greatly exacerbated if federal budget cuts are added to the litany of economic headwinds blowing against recovery (the foreclosure crisis, overleveraged and underemployed consumers, state and local budget crises, a financial sector burdened by bad mortgage securities, and a spreading Eurozone financial crisis, to name just a few). Failure to renew emergency unemployment benefits and the payroll tax cut, coupled with the discretionary spending cuts imposed by the debt ceiling deal, risk 1.8 million job losses in 2012 alone. But just as budget policy has the ability to delay economic recovery, expansionary budget policy can bring about a more rapid decline in the unemployment rate.

In his recent address in Jackson Hole, Wyoming, Federal Reserve Chairman Ben Bernanke warned that fiscal policy must take into consideration the fragility of the economic recovery, and noted that “policies that promote a stronger recovery in the near term may serve longer-term objectives as well. In the short term, putting people back to work reduces the hardships inflicted by difficult economic times and helps ensure that our economy is producing at its full potential rather than leaving productive resources fallow. In the longer term, minimizing the duration of unemployment supports a healthy economy by avoiding some of the erosion of skills and loss of attachment to the labor force that is often associated with long-term unemployment.”

The president should heed this advice and propose a jobs package that would noticeably turn the dial on the unemployment rate. Failure to meaningfully address the jobs crisis, on the other hand, risks a decade of economic hardship, unnecessarily high levels of underemployment, and forgone economic potential. Projections of 7.9% unemployment—above the peak unemployment rates of the previous two recessions—a staggering seven years into this economic slump is no cause for complacency. Alarm bells should be ringing in Washington.

August 29, 2011

Suicide attacks on U.N. -- in Abuja and in Washington

Preoccupied as they were over the weekend by the looming threat of Hurricane Irene, Americans were scarcely aware of the deadly suicide bomber attack that leveled the United Nations offices in Nigeria’s capital of Abuja on Friday.  A group with deepening ties to Al Qaeda claimed responsibility.

Islamist extremists’ hostility to the United Nations is well known.  Osama bin Laden famously reviled it as “nothing but a tool of crime” that “surrendered the land of Muslims [Palestine] to the Jews” and works hand-in-glove with the United States in places like Afghanistan.

But the United Nations is now at risk from an even more destructive assault – from conservative fundamentalists now in power in the U.S. Congress. 

Continue reading "Suicide attacks on U.N. -- in Abuja and in Washington " »

August 27, 2011

The need to rethink housing policy

A great philosopher writes in the New Republic:

Gretchen Morgenson and Joshua Rosner just published a major book, Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon. The book is excellent in explaining the misconduct of executives who ran Fannie Mae and Freddie Mack. Yet it goes off the rails by overstating the role of these firms (and understating the role of others) in creating the housing meltdown and the closely-linked foreclosure crisis. Indeed, our current economic crisis should prompt us to ask more far-reaching questions about the origins of the crisis.

Looking back, many of us—and by “us,” I certainly include liberal Democrats—were slow to recognize the general dangers posed by the housing bubble, and the specific dangers posed by the political economy of government sponsored enterprises (GSEs). Many of us were also unduly credulous about the presumed benefits of home ownership. While perhaps not as easy to address, these uncomfortable questions must be raised if we hope to guard against the possibility of something of this magnitude from happening again.

More here. And no, we don’t get to pick the titles…

August 25, 2011

Graph of the Day: Is the "Great Recession" Really a Household Debt Crisis?

“Why is everyone still referring to the recent financial crisis as the ‘Great Recession’?” asks Harvard economist and former IMF chief Kenneth Rogoff, in a recent article for Project Syndicate. “The phrase 'Great Recession' creates the impression that the economy is following the contours of a typical recession, only more severe – something like a really bad cold,” he adds. “But the real problem is that the global economy is badly overleveraged.”

Unfortunately, the American household is no exception. While political discourse has been dominated in recent months by arguments over our enormous national debt, climaxing with the tense mid-summer negotiations over the debt ceiling in Washington, the problem of household debt has gone largely unmentioned in the media. Now that is beginning to change, as a consensus develops among economists, pundits, and policymakers that Americans’ paralyzing mortgage and credit card debt is the main factor holding the economy back from recovery.

Household debt

The facts are these: although household debt peaked at $116,457 per household in 2008—nearly 100 percent of GDP at the time the financial markets collapsed—mortgage and credit debt has decreased merely seven percent as of 2010. The average American household would have to deleverage an additional 97 percent to return to 1976 levels. And while no one is arguing that household debt needs to be at those levels to restart the economy, it is generally understood that consumption will not increase adequately until Americans’ debts are significantly lower.

When we last experienced a deep recession in 1982, the household debt-to-GDP ratio was about 45 percent, or $17,286. So when the government adjusted its monetary policy, the economy was able to recover quickly. Today, with the average household still holding over $100,000 of debt, a more ambitious program will be required to return demand—and thus unemployment—to pre-recession levels.

Thankfully, a recent New York Times report indicates that the Obama administration may be planning just that. According to the article's sources, who would not be named, White House officials are currently weighing a variety of proposals to allow millions of homeowners to refinance their homes with government-backed mortgages at current low interest rates of about 4 percent, saving those homeowners $85 billion a year and creating a strong stimulus to the economy.

The Washington Post's Ezra Klein, for one, is not optimistic that this kind of government-backed refinancing program could work in the current political climate, but at least it proves that the administration is paying attention to the household debt problem and trying to come up with creative solutions to stimulate demand. Until we find a way to do that, millions of Americans will remain jobless, and the economic recovery will continue at its anemic pace. At the very least, the administration's recognition that the "Great Recession" is really a household-debt crisis sends the positive message that Obama's "pivot" to job creation is more than just hot air.

 

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