Economist's View

"Learning the Lessons of Iraq"

I don't think we will know if the war in Iraq was a success or not until many years, decades even, after we are gone. If, for example, a few years after we leave, Iraq breaks down terribly and alliances that are very much against our geopolitical interests are formed, that won't be a success, will it? We just don't know yet if it is a success or not, and furthermore, if things do break down, we will have no way of knowing if an alternative path would have produced a better outcome -- we can't run the alternative scenario and find out.

I hope it is a success, let there be no mistake about that, but I just don't see how we can say anything beyond so far so good, and we'll see how it goes from here. As for repeating this strategy in Afghanistan, if we don't know for sure that Iraq will remain stable after we leave, and we don't, and if we don't know for sure if it was the surge or something else that caused the reduction in violence, and we don't, then we should be very careful before repeating the strategy once again.

If it was other factors that caused the reduction in violence, in combination with or independent of the surge in troops, and if we can better understand what those factors were, there may be a way to produce a similar outcome in Afghanistan without so much death and destruction.

So before we commit to repeating the same tactic, let's better understand exactly why things improved in Iraq. I realize that whether the reduction in violence is attributed to the surge or not has large political consequences, but I don't care about that, I just want our best assessment of what factors were at work. It's a matter of life and death:

Learning the Lessons of Iraq, by Joseph Stiglitz, Project Syndicate: The Iraq war has been replaced by the declining economy as the most important issue in America’s presidential election campaign, in part because Americans have come to believe that .. the ... ‘surge’ has ... cowed the insurgents, bringing a decline in violence. The implications are clear: a show of power wins the day.

It is precisely this kind of macho reasoning that led America to war in Iraq in the first place. The war was meant to demonstrate the strategic power of military might. Instead, the war showed its limitations. Moreover, the war undermined America’s real source of power – its moral authority. ...

To be sure, the reduction in violence is welcome, and the surge in troops may have played some role. Yet the level of violence, were it taking place anywhere else in the world, would make headlines; only in Iraq have we become so inured to violence that it is a good day if only 25 civilians get killed.

And the role of the troop surge in reducing violence in Iraq is not clear. Other factors were probably far more important, including buying off Sunni insurgents... But that remains a dangerous strategy. The US should be working to create a strong, unified government, rather than strengthening sectarian militias.

Now the Iraqi government has awakened to the dangers, and has begun arresting some of the leaders whom the American government has been supporting. The prospects of a stable future look increasingly dim.

That is the key point: the surge was supposed to provide space for a political settlement, which would provide the foundations of long-term stability. That political settlement has not occurred. ...

Meanwhile, the military and economic opportunity costs of this misadventure become increasingly clear. Even if the US had achieved stability in Iraq, this would not have assured victory in the “war on terrorism,”... Things have not been going well in Afghanistan, to say the least, and Pakistan looks ever more unstable.

Moreover, most analysts agree that at least part of the rationale behind Russia’s invasion of Georgia, reigniting fears of a new Cold War, was its confidence that, with America’s armed forces pre-occupied with two failing wars..., there was little America could do in response...

The belief that the surge was successful is especially dangerous because the Afghanistan war is going so poorly. ... [T]he belief that the surge ‘worked’ is now leading many to argue that more troops are needed in Afghanistan. True, the war in Iraq distracted America’s attention from Afghanistan. But the failures in Iraq are a matter of strategy, not troop strength.

It is time for America, and Europe, to learn the lessons of Iraq – or, rather, relearn the lessons of virtually every country that tries to occupy another and determine its future.

On Dividend Taxes...

Greg Mankiw says that if your goal is to keep dividend taxes low, you should vote for Obama:

On Dividend Taxes, It’s a Post-Partisan Race, by N, Gregory Mankiw, Economic View, NY Times: ...Before 2003, when a person received dividends from his stock holdings, this income was taxed at ordinary income tax rates. That is, a dollar of dividends generated the same individual income tax liability as did a dollar of wages.

But many economists have long argued against taxing dividends this way. Dividends are a stockholder’s payment from corporate profits, and these profits have already been subject to the corporate income tax. Any tax on dividends represents a second tax on essentially the same income.

One can question whether this double taxation of income from corporate capital is fair. But fairness aside, there is also the problem of incentives. Taxing dividends twice substantially raises the overall tax burden ... and distorts various decisions. Whenever taxes, rather than true costs and benefits, drive the allocation of resources, the economy shrinks below its potential. ...

Policy wonks like me have long hoped for changes in the tax code that would eliminate, or at least mitigate, these problems. In 2003, President Bush proposed that all dividends paid out of income that had already been taxed at the corporate level should be exempt from tax at the personal level. ...

Although Congress did not give the president exactly what he sought, it gave him a large chunk of it. The top tax rate for dividends was cut to 15 percent, less than half the top rate for ordinary income. The adverse incentives of the tax ... became much smaller. ...

Senator Obama ... has not been coy about wanting to use the tax code to redistribute income... But for dividend income, Senator Obama has proposed only a modest increase in the top tax rate, to 20 percent from 15 percent. ...

In light of Senator Obama’s stand, the politics of dividend taxation may take some surprising twists. Senator John McCain wants to maintain the current tax rate of 15 percent on dividends..., but it is a good bet that if Senator McCain is elected president, while Congress remains Democratic, Congress won’t give the Republican president what he wants. They would instead let the Bush tax cuts expire, returning the dividend tax for high-income taxpayers to about 40 percent.

By contrast, if Mr. Obama is elected, Congressional Democrats will be less likely to balk at his proposed 20 percent dividend tax rate... On the issue of dividend taxation, Barack Obama may be the candidate with the best chance of preserving George Bush’s legacy.

links for 2008-09-07

• Thomas Friedman’s Plan for a Hot, Flat, and Crowded World - Foreign Policy
• Green Gold Rush: Africa Becoming a Biofuel Battleground - Spiegel
• The Link Between Foreclosures and House Prices - NBER Digest
• Derivatives Markets for Home Prices - NBER Digest
• A rebound for autos? - Econbrowser
• Ending the nation-state myth - Project Syndicate
• The Secrets of Storytelling - Scientific American
• Reserve army of underemployed (in China) - Economist.com
• Loan Giant Overstated the Size of Its Capital Base - NYTimes.com

Fannie and Freddie as Risk Transfer Mechanisms

Richard Green:

What has been the real benefit of Fannie and Freddie?, Richard Green: It is almost certainly not homeowning, and it is almost certainly not funnelling money into underserved neighborhoods or toward underserved borrowers.

Rather, is has been the transfer of interest rate risk from households to investors. So far as I know, the US is the only country in the world with long-term, fixed-rate, 95 percent LTV loans that do not have prepayment penalties. When interest rates rise, borrowers are protected; when they fall, they are not made immobile by yield-maintenance and lockout clauses. The low down payments (and five percent equity seems to be OK) effectively give households with modest incomes access to capital markets. I have written elsewhere that I believe that the peculiar structure of Fannie and Freddie has helped bring about the unique American mortgage.

One could argue that the current environment shows that none of this has been worth it. But I would disagree with that argument.

How Should Policymakers Respond to the Employment Report?

Here's more on the employment report from The Economist:

Postpone the optimism, The Economist: Not long ago economists and policymakers in America clung to hopes that the economy, after lurching through the depths of a financial crisis earlier this year, would rebound in the second six months. Such hopes look all the more forlorn now. On Friday September 5th a depressingly downbeat August employment report was released. The unemployment rate leapt to 6.1% from 5.7% in July. It now stands only just below the 6.3% peak that it reached in the last slump, in mid-2003.  ...

If there is a silver lining to the payroll report it is that, despite eight straight months of declining payroll employment, the pace of contraction has yet to approach that which is typically seen in recessions. On average, since December, 76,000 jobs have been lost each month, equivalent to a monthly decline of 0.06%. From March 2001 to February 2002, the average decline was 169,000, or 0.13%. The better position today may be explained, in part, by the relative strength of exports, without which manufacturing would be shedding jobs at an even faster pace. No doubt the speed with which monetary and fiscal stimulus was brought to bear has also helped. Another factor may be that, during the economic expansion, employers were not quick to hire workers, which left little obvious fat for them to cut now. ...

[P]oliticians ... must now respond in the heat of a campaign. The weak economy probably plays to the advantage of congressional Democrats and the Democratic presidential candidate Barack Obama, who have been pressing for a second stimulus package focused more on government spending than on tax rebates. The latest news may weaken Republican opposition to such a package both in Congress and by John McCain.

The news, unhappily, also makes the job of the Federal Reserve a bit simpler. Its inflation worries in the past month have receded because of welcome news (the big drop in oil prices) and because of less welcome news, such as the higher unemployment figures. That makes it all the more likely that the Fed will not raise interest rates from the current 2% before the end of the year. The latest news may also mollify hawks on the policymaking Federal Open Market Committee...

I think that's right with respect to monetary policy, increasing the interest rate is not a chance we should take at the moment. We should probably be satisfied if monetary policy can simply keep the economy treading water for the moment, any stimulus beyond that will need to come from fiscal policy, or from the economy self-healing (which is unlikely in the short-run).

If we go the fiscal policy route, and I think we need to, my preference is for government spending rather than for tax cuts because it has a more certain effect on aggregate demand, and within the government spending category the preference is for spending on government investment (infrastructure). However, government investment is difficult to bring online quickly (though compensating for losses in state revenue can be implemented quickly, and this can help by preventing states from cutting back on existing infrastructure projects), so some combination of government consumption or transfer payments for the short-run impact, and government investment for the more sustained impact, would be required. The first stimulus package was a one-shot tax cut rather than a sustained stimulus, and that wasn't enough, so if a fiscal policy package is implemented, hopefully this time will be different.

links for 2008-09-06

• European economic integration and trade: how big was the boost? - Vox EU
• A New View On TV - WSJ.com
• McCain Claims about Obama Tax Policy: just plain wrong - ataxingmatter
• If McCain’s Tax Cuts Will Create Jobs, Why Haven’t Bush’s? - EconomistMom
• Obama Economic Advisor Goes on Offense Against McCain - RTE
• Drilling makes us more dependent on foreign oil - knzn
• Is Monetary Policy Really Too Loose? - Macro and Other Market Musings
• Rising unemployment - Econbrowser

Fannie and Freddie Bailout

How will this play with respect to the election? Can McCain run against the bailout? Is there some way for Obama to use this to his advantage, e.g. by talking about the failure to impose adequate regulatory control under the Bush administration and how that will continue with McCain? I don’t think it matters much for the election except for the overall perception that things aren’t going very well, and that's bad news for the incumbent and for the incumbent's party:

U.S. Rescue Seen at Hand for 2 Mortgage Giants, NY Times: Senior officials from the Bush administration and the Federal Reserve on Friday informed top executives of Fannie Mae and Freddie Mac ... that the government was preparing to seize the two companies and place them in a conservatorship...

The plan, effectively a government bailout, was outlined in separate meetings that the chief executives were summoned to attend... The executives were told that ... they and their boards would be replaced, shareholders would be virtually wiped out, but the companies would be able to continue functioning with the government generally standing behind their debt...

It is not possible to calculate the cost of any government bailout, but the huge potential liabilities of the companies could cost taxpayers tens of billions of dollars and make any rescue among the largest in the nation’s history. ...

Under a conservatorship, the remaining common and preferred shares of Fannie and Freddie would be worth little, and any losses on mortgages they own or guarantee could be paid by taxpayers. A conservatorship would operate much like a pre-packaged bankruptcy, similar to what smaller companies use to clean up their books and then emerge with stronger balance sheets. ...

"A Chinese Conspiracy Theory"

Andrew Leonard at Salon sums up recent commentary on Chinese investments in U.S. bonds that is going sour, and provides some of his own:

A Chinese conspiracy theory, Andrew Leonard: Hardly a day goes by without Dean Baker finding something to get angry about in the pages of the New York Times or Washington Post, but on Friday morning the co-director of the Center for Economic and Policy Research delivered a double-dose of dyspeptic sputtering.

"Is China's Central Bank Run By Morons?" asks Baker, responding to a Times piece detailing the woes of the People's Bank of China, which has found itself stuck with a gargantuan pile of U.S. bonds that are turning out to be a pretty bad investment.

Baker can't understand how anyone could have been stupid enough, back in 2001 or 2002, not to foresee that the then mighty dollar would inevitably decline, given the size of the U.S. trade deficit. If the Times' Keith Bradsher was reporting accurately, argues Baker, when he quoted an expert in Chinese financial affairs as saying that many bank officials "resented the institution's losses," then the Times misjudged the importance of the story.

If the people who run China's central bank are really this ignorant, that should have been the headline of the article, which should have been on the front page.

I think Baker is overstating the case to declare that "Apart from buying bonds from Zimbabwe, it's hard to imagine how [the Chinese] could have made a worse investment." After all, if the Chinese hadn't been bailing out the U.S. financial system, where would the U.S. have gotten the money to pay for all the Chinese-made goods whose export has fueled China's economic rise?

To me, the most interesting tidbit in Bradsher's story was a reference to a conspiracy theory currently all the rage in China.

From the Times:

[The expert] said the officials blamed the United States and believed the controversial assertions set forth in the book "Currency War," a Chinese best seller published a year ago. The book suggests that the United States deliberately lured China into buying its securities knowing that they would later plunge in value.

"A lot of policy makers in China, at least midlevel policy makers, believe this," Mr. Shih said.

That nugget reminded me of a line from a long, if not particularly interesting or insightful essay about Chinese-U.S. relations by Treasury Secretary Hank Paulson in the current Foreign Affairs.

Despite the two countries' long history of interaction, they frequently display a stunning ability to misunderstand each other.

Seriously; the officials at the People's Bank of China probably aren't morons, but they do betray a breathtaking misunderstanding of the quality of recent government in the United States if they think we could intentionally pull off that kind of massive grifter's scam on China. We're not worthy.

Another line from Paulson's essay is apropos here:

Exploiting popular anxieties about globalization, economic nationalists in China are questioning the benefits of China's integration into the international economic system.

That sentence also holds true if one substitutes the words "United States" for "China." Both nations boast sizable factions who believe the other side is taking advantage of them. I don't normally find myself in Paulson's camp, but I've got to agree with him on this one -- the U.S. and China are not playing a zero-sum game. China's bankrolling of U.S. debt has been critical to the stability of the U.S. economy and the U.S. appetite for Chinese goods has translated into increased prosperity for hundreds of millions of Chinese.

That's not necessarily a bad thing.

Brad Setser comments here.

Why We Need Community Organizers

Are you better off today than you were eight years ago? If you are the top of the food chain, the answer is yes, but for everyone else the answer is generally no. And today's news doesn't help. The unemployment rate rose from 5.7 to 6.1 percent in August, and the broadest measure of unemployment (U6) now stands at 10.7%. That's up from 10.4% a month ago, and 8.4% a year ago.

When you look further into the numbers and break them down into groups who generally struggle economically, conditions are much worse. If you are a woman trying to maintain a household, your unemployment rate rose from 8.5% to 9.6%. The unemployment rate for blacks rose from 9.7% to 10.6%, and for Hispanics from 7.4% to 8.0%. Teen unemployment actually fell by 1.6% as compared to last month, but it still stands at 18.9%. And for the slightly older age group, ages 20-24, the rate stands at 10.5%. And those are all the narrow measure of unemployment, U3. The broader measures such as U6 would, of course, show conditions to be much worse.

Have Republicans devoted enough attention to these issues? No. This brings us to an important point.

Republicans have been targeting Community Organizers this week, but one of the important things Community Organizers do is clean up after Republicans. Without their help, and given Republicans blindness to these issues and the needs of these communities, and given that their trickle down economic policies have not, in fact, trickled down, conditions would be much worse.

Here's more discussion of the report:

Paul Krugman: The Resentment Strategy

The "raging rajas of resentment" attempt to exploit a powerful force:

The Resentment Strategy, by Paul Krugman, Commentary, NY Times: Can the super-rich former governor of Massachusetts — the son of a Fortune 500 C.E.O. ...— really keep a straight face while denouncing “Eastern elites”?

Can the former mayor of New York City, a man who ... “marched in gay pride parades, dressed up in drag and lived temporarily with a gay couple and their Shih Tzu” — that was between his second and third marriages — really get away with saying that Barack Obama doesn’t think small towns are sufficiently “cosmopolitan”?

Can the vice-presidential candidate of a party that has controlled the White House, Congress or both for 26 of the past 28 years, a party that, Borg-like, assimilated much of the D.C. lobbying industry into itself — until Congress changed hands, high-paying lobbying jobs were reserved for loyal Republicans — really portray herself as running against the “Washington elite”?

Yes, they can. ...

[T]he Republican Party, now more than ever, is firmly in the hands of the angry right... What’s the source of all that anger? ... [M]uch ... of the anger ... is based ... on the perception — generally based on no evidence whatsoever — that Democrats look down their noses at regular people.

Thus Mr. Giuliani asserted that Wasilla, Alaska, isn’t “flashy enough” for Mr. Obama, who never said any such thing. And Ms. Palin asserted that Democrats “look down” on small-town mayors — again, without any evidence.

What the G.O.P. is selling, in other words, is the pure politics of resentment; you’re supposed to vote Republican to stick it to an elite that thinks it’s better than you. Or to put it another way, the G.O.P. is still the party of Nixon.

One of the key insights in [the book] “Nixonland”... is that Nixon’s political strategy throughout his career was inspired by his college experience, in which he got himself elected student body president by exploiting his classmates’ resentment against the Franklins, the school’s elite social club. There’s a direct line from that student election to Spiro Agnew’s attacks on the “nattering nabobs of negativism” as “an effete corps of impudent snobs,” and from there to the peculiar cult of personality that ... surrounded George W. Bush — a cult that celebrated his anti-intellectualism and ... the supposed fact that the “misunderestimated” C-average student had proved himself smarter than all the fancy-pants experts.

And when Mr. Bush turned out not to be that smart after all, and his presidency crashed and burned, the angry right — the raging rajas of resentment? — became, if anything, even angrier. Humiliation will do that.

Can Mr. McCain and Ms. Palin really ride Nixonian resentment into an upset election victory...?...

By selecting Barack Obama as their nominee, the Democrats may have given Republicans an opening: the very qualities that inspire many fervent Obama supporters — the candidate’s high-flown eloquence, his coolness factor — have also laid him open to a Nixonian backlash. Unlike many observers, I wasn’t surprised at the effectiveness of the McCain “celebrity” ad. It didn’t make much sense intellectually, but it skillfully exploited the resentment some voters feel toward Mr. Obama’s star quality.

That said, the experience of the years since 2000 — the memory of what happened to working Americans when faux-populist Republicans controlled the government — is still fairly fresh in voters’ minds. Furthermore,... the G.O.P. really is the Gramm Old Party — it really does believe that the economy is just fine, and the fact that most Americans disagree just shows that we’re a nation of whiners.

But the Democrats can’t afford to be complacent. Resentment, no matter how contrived, is a powerful force, and it’s one that Republicans are very, very good at exploiting.

"The Dream for a Human Capital Agenda"

Ed Glaeser says education is the answer:

The dream for a human capital agenda, by Edward L. Glaeser, Commentary, Boston Globe: ...[I]n this hopeful season of presidential change, even economists need to be for something. Some of my colleagues labor to improve healthcare; others fight for tax reform. My dream is that one, or both, candidates will make human capital the centerpiece of their campaign. ...

America's future will ... depend on the skills of its citizens. In a remarkable new book,... Claudia Goldin and Lawrence Katz make a compelling case that America's 20th-century achievements owed much to our nation's once-robust investment in education, and that since the 1970s the growth in that investment has slowed dramatically.

Also since the mid-1970s, America has become much more unequal. ...[M]illions of Americans seem to have reaped, at best, modest benefits from the past 30 years of technological change.

Scrooge-like economists stress that most means of fighting inequality carry large costs. Progressive taxation reduces the incentives for entrepreneurship. Taxes on capital gains reduce investment. Allegedly redistributive regulations, like rent control, restrict the supply of things, like apartments, that should be abundant. Large welfare programs create the prospect of a permanent, government-funded underclass.

By contrast, investing in human capital offers the potential for permanent increases in earnings that encourage work. Education increases the ability to deal with innovation, so that investing in skills today will make Americans better able to weather the storms of future technological changes. ...

A national human capital agenda requires investing in all children, not just those who might be left behind... Such spending needs to be justified by more than just a desire to reduce inequality. The case for governmental investment in education reflects the fact all of us become more productive when our neighbors know more. ... As the share of adults in a metropolitan area with college degrees increases by 10 percent, the wages of a worker with a fixed education level increases by 8 percent. Area level education also seems to increase the production of innovations and speed economic growth.

American education is not just another arrow in a quiver of policy proposals, but it is the primary weapon ... to fight a host of public ills. One can make a plausible case that improving American education would ... improve health outcomes... People with more years of schooling are less obese, smoke less, and live longer. Better-educated people are also more likely to vote and to build social capital by investing in civic organizations. ...

Because education is both important and difficult, it should be at the center of the presidential political debates.

I also support education and believe a better educated workforce is one of the keys to remaining competitive in the global economy. People with more education will, in general, do better than people with less. But I'm not sure that education alone, particularly in the short-run, is enough to ensure that gains are more equitably distributed. And while I believe education can help with the problem, it's not at all clear that differences in education alone can explain the growth in inequality we have experienced since the growth is concentrated at the very top of the income distribution, and returns associated with a college education have stalled while inequality has risen.

links for 2008-09-05

• Are exchange rates unpredictable? The asset pricing approach redux - Vox EU
• Wal-Mart Thrives When Democrats Are in Charge - WSJ.com
• Housing Expenditures and Wages - Richard Green
• Intellectual work induces excessive calorie intake - EurekAlert
• ‘The Question of Global Warming’: An Exchange - New York Review of Books
• Wage Insurance - Kevin Drum
• Global Property Bubbles: Not Bursting - Felix Salmon
• Hawks and Doves Living Together - Real Time Economics
• Employment watch - macroblog
• Who in U.S. Gets Hurt Most by Food-Price Inflation? - Zubin Jelveh
• ‘Pardon me while I retch’ - Willem Buiter

Common Misconceptions about the Consumer Price Index

The BLS responds to criticism about the CPI. The answers are on the continuation page:

Common Misconceptions about the Consumer Price Index: Questions and Answers, BLS: An August 2008 Monthly Labor Review article by BLS economists John Greenlees and Robert McClelland reviews and analyzes some common misconceptions about the Consumer Price Index (CPI.) Those analyses are summarized here:

1. Has the BLS removed food or energy prices in its official measure of inflation?
2. The CPI used to include the value of a house in calculating inflation and now they use an estimate of what each house would rent for -- doesn't this switch simply lower the official inflation rate?
3. When the cost of food rises, does the CPI assume that consumers switch to less expensive and less desired foods, such as substituting hamburger for steak?
4. Is the use of "hedonic quality adjustment" in the CPI simply a way of lowering the inflation rate?
5. Has the BLS selected the methodological changes to the CPI over the last 30 years with the intent of lowering the reported rate of inflation?
6. Does the Bureau of Labor Statistics calculate the CPI the same way as other nations? Do any differences in method keep the US CPI lower than the CPIs of those other nations?

The Homer Simpson Euro

From Bluematter, The Homer Simpson Euro:

The art of the hobo nickel - carving new imagery into currency. ... Here's more currency from the Original Hobo Nickel Society.

The Market Has Spoken, and It's Not Impressed

The stock market reacts to last night's speech:

U.S. stocks tumbled, sending the Standard & Poor's 500 Index to the longest stretch of losses since January

The news media is blaming the drop on economic data such as the news about rising jobless claims that was released today, or are unsure what caused it, but in good old Republican spirit, we know the market dropped for one reason, and one reason only, it doesn't like Sarah Palin and John McCain's economic plans. The increased chance they might win after last night's speech sent the market into a tailspin.

This has been another issue of "What Would They Say If It Was a Democrat?"

[Update: In response to comments, please note: I AM NOT SERIOUS!!! The point is about saying one thing when it's Democrats, another when it's one of their own - e.g. it is quite common for them to say that a drop in the market was in response to some Democratic proposal and I was poking fun at that (I thought that was commonly known, my mistake). But the serious part of the what would they say question, for me anyway, is that I really don't understand why Republicans get away with so much hypocrisy. Democrats get nailed for technical flip-flops, but the blatant hypocrisy from the other side is ignored? I don't get that.]

The New Wave of Globalisation: This Time, It’s Really Different

The "Great Unbundling" is more unpredictable, sudden, and individual than in the past:

Globalisation as the great unbundling(s): What should governments do?, by Richard Baldwin, Vox EU: The Kiel Institute’s Global Economic Symposium – something like a New Century Davos – is being held in a Northern German castle... Globalisation is on the agenda. Alan Blinder has contributed his thoughts on “Offshoring, Workforce Skills, and the Educational System.” Here are my comments on the subject.

The new new

This is the second time in as many decades that I write about “the new wave of globalisation”. But this time, it’s really different. It’s tempting to rattle off the conclusions and hope readers have forgotten the 1990s contributions on globalisation. But that would be too easy. It is important to understand why things are different this time.

"Getting It Wrong"

I don't think Robert Solow liked this book:

Getting it Wrong: Review of Kevin Phillips' Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism, by Robert Solow: Turmoil in the financial market and insecurity in the labor market--we have plenty of both--bring out good and bad books, like good and bad mushrooms after a rain. In the instance before us it is the financial market that is in turmoil, and this is definitely not a good book. The only nice thing I can say about Bad Money is that taking critical aim at our complex, overblown, and now evidently dangerous financial system is a fine idea. The trouble is that Kevin Phillips stays throughout at the superficial level of Chicken Little. Terrible things are happening, and will continue to happen; but despite a certain pretentious hinting at deeper understanding and a few loose references to historical parallels, there is nothing very enlightening to be found in these pages. [...continue reading...]

GDP per Capita versus Median Family Income

Here's a nice way to picture the growth in inequality in recent decades from Lane Kenworthy:

Slow Income Growth for Middle America, by Lane Kenworthy: The economic challenges and strains facing middle-class Americans are likely to get a good bit of attention between now and election day, at least from the Obama campaign. They include sluggish income growth, heightened financial insecurity, rising health care and college costs, and falling home values. Each of these is important, but the most critical in my view is slow growth of incomes.

The following chart tells the story.

links for 2008-09-04

• Home-Price Bottom May Still Be a Year Away - Real Time Economics
• Economy Stays Stuck as Consumers Cut Back - NYTimes.com
• Shared capitalism and employee ignorance - Vox EU
• Assessing the Value of Small Wind Turbines - NYTimes.com
• Nasty - The Edge of the American West
• Mattresses and Mortgages - Richard Green
• Why the inflation scare may not be over - Daniel Gross
• The Most Ridiculous Article I Have Ever Read - Exuberant Rationality
• Texas Railroad Commission - Spencer
• Boston's Rosengren on the Credit Crunch - Real Time Economics

Small Towns and Big Time Politics

When you grow up in a small or mid-sized town, over time you come to realize that people from bigger towns, in general, have a condescending attitude about how and where you grew up. I think it starts to really dawn on you in junior high and high school as you begin interact with kids from bigger cities, and college certainly reinforces this feeling.

You couldn't possibly be up on the latest cool trends, be as sophisticated, be as savvy, etc., as they are because you grew up out in the sticks.

The GDP Deflator and the Inflation Rate

There is confusion between the GDP deflator and other measures of prices such as the CPI and the PCE deflator. Here's one way to think about it that might help to clear things up.

The CPI (or the PCE) attempts to measure how the prices of a typical market basket of goods changes over time. The idea is to measure the impact of price changes on the consumption bundle of the average household.

However, that's not what the GDP deflator measures. Just as we can think of a typical bundle of goods that a household consumes, we can also think about the price of a unit of GDP. GDP is composed of four elements, consumption, investment, government spending, and net exports. For example, real GDP might be 600 C's, 200 I's, 150 G's and 50 NX's. If so, we can think of a unit of GDP as .6 units of the consumption good, C, .2 units of the investment good, .15 units of the investment good, I, and .05 units of net exports, NX.

Imagine, then, going to the store and purchasing a unit of GDP off the shelf. That package, the unit of GDP you are purchasing, would come in these proportions, and the GDP deflator is the price that you would have to pay for this unit of GDP. But there is no reason to think that this unit of GDP will be the same as a unit of the market basket consumed by a typical household. To start with, investment goods are not part of the household's consumption bundle. Secondly, GDP is what we produce domestically, within our borders. Some of what we produce is traded for goods produced outside our borders. The GDP deflator will not reflect this, but the CPI will since the imported goods would be in the market basket used to track prices over time.

The point is that the basket of goods tracked by the GDP deflator, which is a unit of GDP, is not the same as the typical basket of goods consumed by households (which is dominated by the C component of GDP). The GDP deflator has a very specific purpose, and it's name tells you exactly what that purpose is. It should be used to deflate nominal GDP to obtain real GDP. It is not a measure of household inflation, nor is it intended to be, and using to measure the rate of inflation rate faced by households is not appropriate.

Here's David Altig with another way of looking at this:

Does the GDP deflator lie?, macroblog: Though last week’s report on U.S. gross domestic product (GDP) growth in the second quarter is second-hand news by now, I’ve taken note that Barry Ritholtz’s views on the news has, in particular, continued to rumble through the blogosphere. Barry is not happy with the GDP deflator, and samples approvingly from a Barron’s article by Aaron Abelson:

“GDP, in common parlance, stands for stands for gross domestic product, or the aggregate value of all the goods and services produced on these blessed shores... These days, alas, those initials more typically signify “gross deceptive pap”...

“Comes now the so-called preliminary estimate that claims second-quarter GDP grew by a much more robust 3.3%.

“The key here is the GDP deflator, which purports to adjust GDP for the impact of inflation; it’s a curious calculation in that, contrary to its moniker, it seems designed to do the exact opposite of deflating GDP.

“Thus, according to this accommodating measure (accommodating, that is, if you’re determined to put a good face on a dreary report), inflation grew at an improbably restrained 1.33% in April-June. And maybe it did—but not in the good old U.S. of A. However, obviously more important than accuracy to those doing the calculating is this simple equation: The lower the deflator, the greater the growth of GDP…

“Of course, even by the government’s not entirely extravagant figuring, the consumer price index was up a hefty 8% in the latest quarter. Perhaps the computer that tallies the CPI doesn’t talk to the computer that measures the deflator.”

Strong words, but if you ask me, misguided. Barry actually makes the case against the case in this picture, about which he notes:

“It’s no coincidence that the current situation resembles past ones where oil prices had spiked. Since more than half of the U.S. Crude consumption is imported, the price and quantity go into all GDP calculations as a negative.”

Exactly. Let me provide an elaboration of the spot-on point made at The visible hand in economics blog. For the sake of argument assume that every drop of oil consumed in the United States is imported, and everything imported to the United States is oil. If we leave exports out of the picture for simplicity, we can think of U.S. consumption as consisting of GDP—everything produced in the United States—and imported oil.

Suppose, then, that the price of oil rises precipitously. If both incomes and oil consumption are relatively fixed in the short-run, what would we expect to happen? The answer is more expenditure on imported oil and less spending on everything else. As the demand for domestically produced goods and services falls, so would their prices. (Or more generally, they would rise at a slower than normal pace.) Since domestically produced goods and services by definition constitute GDP, GDP-deflator inflation will be low, while the consumer price index (which would include nonexported GDP plus imports) could well be quite high.

Voila! A simple Econ-101 explanation, with nary an insult hurled at the good folks from the Bureau of Economic Analysis.

That said, there are plenty of reasons to be cautious in interpreting last week’s report. Mark Thoma has a fine roundup of many fine points by many fine bloggers. To that list I’d add comments by Spencer at Angry Bear, William Polley, Lim at The Skeptical Speculator, Ben Leeson at Working Thoughts, Zubin Jelveh and Felix Salmon (both at Portfolio.com), to name a few. But I would delete the suspicion that low GDP-deflator-based inflation suggests shenanigans are afoot.

Does Shared Capitalism Work?

When I think about the evolution of economic systems over time, from a nomadic existence long ago through feudalism and eventually capitalism, I often wonder if capitalism is the end of the road, the last and best economic system that will emerge. I'm not sure, but I see no necessary reason why we can't do better.

But what would come next? One possibility is employee ownership. At first glance it appears to provide better incentives to workers than wages, but more thought leads to a consideration of free riding problems - if everyone but you works really hard you will still receive a large profit share - and it was never clear how such a system could work in its pure form since the entrepreneurial function would be absent. That is, how would new businesses get started? Who would accumulate the capital and execute the plans needed to get things going? Financial innovation could pool funds, but how does a large group of workers get together and decide to open a new business? It seems like some sort of individual entrepreneurship function would still be necessary, coupled with some economic incentive to transfer ownership to workers over time.

Despite those problems, however, employee ownership is growing in popularity:

Does shared capitalism work in the United Kingdom?, by Alex Bryson and Richard B. Freeman, Vox EU: Does shared capitalism work in the United Kingdom?

Of course it does. Isn’t John Lewis the best store in the world?

Of course it doesn’t. Except for John Lewis, the best store in the world.

Shared capitalism, by which we mean firms that pay all or almost all employees in part on the basis of performance of their enterprise or workplace, has traditionally been viewed as a niche part of an economy; John Lewis in the United Kingdom, Mondragon in Spain, and at one point United Airlines in the United States. In its 1991 PEPPER (Promotion of Employee Participation in Profits and Enterprise Results) Report and in ensuing reports, the European Union endorsed ownership and profit sharing.

Our analysis shows that in the United Kingdom and United States, and to a growing extent in other advanced countries, shared capitalist modes of pay and work arrangements have increased way beyond niche economic status. Today, more employees have a bigger financial stake in their firms than ever before. Forty-four percent of US workers have part of their pay linked to company performance, either through ownership, stock options, profit sharing, or gain sharing. In Britain, one-fifth of private sector workplaces have share ownership schemes covering one-third of employees (Bryson and Freeman, 2008).

China, Iraq, Oil, and Geopolitical Stability

I think this is right, we should encourage this:

A new dynamic for the Middle East, econbrowser: Maybe it's time to try something new. And maybe it's already starting.

Last week the New York Times reported:

In the first major oil deal Iraq has made with a foreign country since 2003, the Iraqi government and the China National Petroleum Corporation have signed a contract in Beijing that could be worth up to $3 billion, Iraqi officials said Thursday.

Under the new contract, which must still be approved by Iraq's cabinet, the Chinese company will provide technical advisers, oil workers and equipment to help develop the Ahdab oil field southeast of Baghdad, according to Assim Jihad, a spokesman for Iraq's Oil Ministry. If the deal is approved, work could begin on the oil field within a few months, Mr. Jihad said.

And today the Guardian confirms that the deal was approved by Iraq's cabinet.

There are some Americans who regard expanding Chinese global influence with fear and suspicion. But I maintain that stability and prosperity for Iraq and the broader Middle East should be the primary U.S. objective at the moment. Although China of course has its own reasons to be interested in the region, those interests are undermined by terrorism and regional instability just as much as ours. And precisely because China is a distinct power with separate interests from the U.S., its status as a more neutral third party leaves it in a position to assist in restoring stability to Iraq and the region in ways that the U.S. cannot. The perception that the purpose of toppling Saddam Hussein was to benefit U.S. oil companies greatly undermines our capacity to bring peace to the region. One way the U.S. can signal that our goal is instead regional stability is by embracing a larger role for China in Iraq and the Middle East.

Some may ask, What good does it do Americans if Iraqi oil gets shipped to China? The answer is, it is a global market for oil... [P]rice depends on the total quantity produced globally and the total quantity consumed globally. More global production means a lower price, and which country consumes which oil is of little practical significance... But it matters a great deal for the price that American consumers pay for oil whether the Iraqi oil is produced or is not produced.

Others may worry that higher oil production today just leaves the world with less of this depletable resource for the future. But to this I would counter that the transition to a world when global oil production no longer increases each year will raise some tremendous geopolitical stresses. The more stability and cooperation we can have as we enter that phase, the better off we will be.

You've heard it said, "What's good for General Motors is good for the U.S." But I say, "what's good for Iraq and China is good for the U.S."

Northern Extremism

I’ve been holding off discussing the Sarah Palin nomination, but briefly, here goes.

I think she needs to be framed as a “northern extremist” as soon as possible. She’ll survive all the rest, I think, and the rugged corruption fighting, tax-cutting, church going, family loving, snowmobile riding, frontier image they have planned for her will be attractive if it isn’t transformed into something most people would view as an interesting character, certainly, but much too extreme in far too many ways to be elected to the second highest office in the land. She has plenty of extreme views, so it's not a false characterization, and with the AIP connections, the earmarks, commitment to oil companies, the bridge to nowhere problem, abortion views, her views on regulation, social programs, banning books, taxes, and so on - not to mention the ethics questions that still need to be answered - it should be possible to highlight how unconventional she is in ways that extend beyond eating moose.

If it were my choice, I’d drop the whole discussion about qualifications – why fight about how close Alaska is to Russia or how many square feet or people or whatever there are in Alaska versus elsewhere when, to me, that isn’t the main issue and takes away from the time that could be used to expose her extreme political views. Just because she does not live in a giant city or populous state, is a woman, has kids, or whatever, does not automatically lead to the conclusion that she has no knowledge of world affairs, or that she lacks the other knowledge and personal traits she needs to be effective if she has to step in and serve as president on day one, and an adamant stance that she is not qualified before giving her a chance to answer questions about these things is a mistake. I can certainly imagine someone with no time at all in elected office that I would view as very qualified (though I think it’s entirely fair to point out that that there are important open questions that, once answered, may lead to the conclusion that she is not ready, and I also think the right null hypothesis for any candidate is that they are not ready unless there is sufficient evidence to the contrary).

I think the campaign more generally needs to avoid "chasing the rabbit" and stay focused on the issues people care about, jobs, health care, things like that. The selection process puts McCain's judgment in play as well, though I wonder how much staying power that issue will have (how the selection was made is independent of the attributes of his selection, this is about what we learn from how the choice was made). As part of the discussion of the issues, they should target her extreme views until that’s the topic of discussion where she is concerned. Focus on her extreme beliefs, and the decisions she is likely to make because of them and stay on message day and night. The rest is a distraction from defining her in a way that causes people to be wary of what she might do if she is given the chance.

On that front, there's still a lot to find out, I have no idea how she feels about healthcare reform, Afghanistan, and many, many other important issues, but what I have learned so far is that her policies are like her moose-eating personality – far out of the mainstream – and the sooner that message gets out, the better.

links for 2008-09-03

• Does the GDP deflator lie? - macroblog
• Gramm Reiterates “Whiners” Argument - Matthew Yglesias
• Feldstein and Taylor Can't Obscure the Truth - Economists for Obama
• Good Money - Marginal Revolution
  
• Economy? What Economy? - washingtonpost.com
• The Neurological Roots of Genius - Scientific American
• Braking the Virus - Olivia Judson
• How the Fed Can Fix the World - Op-Ed - NYTimes.com
•   Vetting - Robert Reich
• "Energy resources and our future" - 1957 - Energy Bulletin
• Anti-Shirking Penalties in US Climate Change Bills Could Backfire - Jeff Frankel
• 3 Directors of the Fed Advocated a Rate Rise - NYTimes.com
• Unqualified for Duty - Watchdog Blog
• Glaeserfication - The Bellows
• Corporations and the Conventions - Robert Reich

Will Trickle Down Policies Help "All Americans"?

There is an editorial in the WSJ today by Martin Feldstein and John Taylor that is - surprise! - supportive of McCain's economic policies, and dismissive of Obama's. Two policies they highlight are "a package of tax incentives that will create jobs and raise earnings by inducing firms to invest more in the U.S.," and "doubling the personal exemptions for families with children, which will reduce the tax burden on working Americans.":

Here a response from the Wonk Room

In Wall Street Journal, McCain Econ Advisers Claim McCain’s Tax Plan Benefits ‘All Americans’:  Today, Martin Feldstein and John Taylor, two of Sen. John McCain’s (R-AZ) economic advisers, published an op-ed in the Wall Street Journal claiming that McCain’s tax plan is designed to help “all Americans,” “especially those in the hard-pressed middle class,” and that “Mr. McCain will bring the budget into balance.”

In reality, McCain’s plan will significantly favor the ultra-rich and America’s largest corporations over the middle class, while driving up the federal deficit. Here is a dissection of the McCain campaign’s argument, and why McCain’s plan doesn’t really help “all Americans”:

CLAIM: John McCain’s tax policies are designed to create jobs, increase wages and allow all Americans — especially those in the hard-pressed middle class — to keep more of what they earn.

FACT: McCain’s tax plan delivers almost half its benefits to the top 1% of taxpayers, and gives the top 0.1% a $1 million tax cut. The only middle class tax cut his campaign can cite is “drill, drill, drill.”

CLAIM: Mr. McCain’s plan will significantly ease the tax burden on American families with children by doubling the personal exemption to $7,000 from $3,500.

FACT: According to the Tax Policy Center, “although this provision is sometimes described as a doubling of the personal exemption, that is true only in the first year, and then only for lower-income married couples,” leaving everyone else out. Every other family’s exemption is not fully phased in until 2016, and “because it is not refundable, it is worth nothing to poor families and little to many in the working-class.” Over 100 million families receive no tax cut under McCain’s plan.

CLAIM: Mr. McCain will bring the budget into balance.

FACT: As the Wonk Room has previously noted, McCain could not balance the budget with his current tax proposals, even if he cut ten cabinet agencies. His budget would create the largest deficit in 25 years.

Of course, the McCain campaign already has a history of disconnect between what it says and what it means. This op-ed is no exception: when McCain says his plan helps all Americans, he means the wealthy and the Fortune 200.

The plan involves tax breaks for the wealthy and for corporations, which the editorial says will increase productivity, and the hope is that jobs and income trickle down to those who really need it. We've seen this argument before, and we know how supply-side policies turns out. Lots of gains at the top, nothing in the middle and the bottom leading to rising inequality, little evidence that the tax cuts stimulate economic growth, and rising deficits that places the burden of the tax cuts for the wealthy on future taxpayers.

This is supposed to help all Americans?

"Rich Man’s Burden"

Is it really a burden?:

Rich Man’s Burden, by Dalton Conley, Commentary, NY Times: For many American professionals, the Labor Day holiday yesterday probably wasn’t as relaxing as they had hoped. They didn’t go into the office, but they were still working..., they were unable to turn off their BlackBerrys, their laptops and their work-oriented brains. ...

[I]t is now the rich who are the most stressed out and the most likely to be working the most. Perhaps for the first time since we’ve kept track of such things, higher-income folks work more hours than lower-wage earners do. ...

This is a stunning moment in economic history: ... Today, the more we earn, the more we work, since the opportunity cost of not working is all the greater (and since the higher we go, the more relatively deprived we feel). ...

It would be easy to simply lay the blame for this state of affairs on the laptops and mobile phones that litter the lives of upper-income professionals. But ... less visible forces have given birth to this state of affairs.

One of these forces is America’s income inequality, which has steadily increased since 1969. ... If we divided the American population in half, we would find that those in the lower half have been pretty stable over the last few decades... However, the top half has been stretching out like taffy. In fact, as we move up the ladder the rungs get spaced farther and farther apart.

The result of this high and rising inequality is what I call an “economic red shift.” Like the shift in the light spectrum caused by the galaxies rushing away, those Americans who are in the top half of the income distribution experience a sensation that, while they may be pulling away from the bottom half, they are also being left further and further behind by those just above them.

And since inequality rises exponentially the higher you climb the economic ladder, the better off you are in absolute terms, the more relatively deprived you may feel. In fact, a poll of New Yorkers found that those who earned more than $200,000 a year were the most likely of any income group to agree that “seeing other people with money” makes them feel poor.

Because these forces drive each other, they trap us in a vicious cycle: Rising inequality causes us to work more to keep up in an economy increasingly dominated by status goods. That further widens income differences. ... So, if you are someone who is pretty well off but couldn’t stop working yesterday nonetheless, don’t blame your iPhone or laptop. Blame a new wrinkle in something much more antiquated: inequality.

This makes it sound as though the lower number of hours at lower incomes is the result of worker preferences (i.e. from difference in the labor supply curve across income levels). But I don't think that's the whole or even the biggest part of the story, labor demand has likely played a role as well.

links for 2008-09-02

• Study on Swiss children shows fair-mindedness comes with age - swissinfo
• The Fed is right to focus on providing liquidity - FT
• Tipping points in financial exchange competition - Vox EU
• Fed's Hoenig Says Institutions Must Be Allowed to 'Fail' - Bloomberg
• Credit Cards: Not Dead Yet - Felix Salmon
• Fed's Kroszner Says U.S. Economy Not 'Decoupled' - Real Time Economics

DeLong: Is Inflation the Right Battle?

Brad DeLong asks whether we should be more concerned with inflation or with unemployment:

Is inflation the right battle?, by J. Bradford DeLong, Project Syndicate: The Federal Reserve and other central banks are coming under pressure from two directions these days: from the left, they are pressured to do something to expand demand and hold down global unemployment; from the right, they are pressured to contract demand to rein in inflation.

This is a situation ripe for trouble, because one of these two diagnoses must be wrong. If the world’s central banks raise interest rates while the major problem is insufficient global demand, they might cause a depression. If they do not raise interest rates while the major problem is inflation, they might cause ... a stubborn wage-price spiral like that of the 1970’s that can be unwound only with a later, deeper depression.

I see the left as being correct — this time — in the global economy’s post-industrial North Atlantic core. Headline inflation numbers are the only indication that rising inflation is a problem, or even a reality. The ... indicators of developed-country nominal wage growth show no acceleration... And “core inflation” measures show no sign of accelerating inflation either.

The United States is experiencing a ... financial meltdown... In normal times, the Fed’s response — extremely monetary stimulus — would be highly inflationary. But these are not normal times. Indeed, the Fed’s monetary policy has not been sufficient to stave off a US recession, albeit one that remains so mild that many doubt whether it qualifies as the real animal.

The European Central Bank’s response has been analogous to the Fed’s, but less forceful... And in Western Europe, too, GDP is now declining.

In brief, the major central banks on both sides of the Atlantic have responded to the financial crisis, but they have not overreacted. ...

Yet headline inflation is soaring, and, not surprisingly, gets the headlines. This reflects three developments. First, the world has, for the moment at least, reached its resource limits, and we are seeing a big shift in relative prices... The result of this relative price shift is headline inflation.

Second, inside the US, the return of the dollar toward its equilibrium value is carrying with it import price inflation. Costs to US consumers are rising and making them feel poorer, not because they have become poorer, but because the previous pattern of global imbalances exaggerated their wealth. Global rebalancing is painful for American consumers, and shows itself as higher headline inflation. ...

Finally, ... China’s policy of export subsidies through currency manipulation was always bound to become unsustainable in the long run because it was bound to generate substantial domestic inflation. Now it is also generating substantial pain for other developing countries as China’s booming economy outbids them for resources. But it is politically impossible for the Chinese government to alter its exchange-rate policy under pressure without some “concession” from the US, and a tightening of US monetary policy could be sold as such a “concession.”

But this overlooks what ought to be at the center of the discussion: higher US unemployment right now ... offers few benefits, if any, for stabilizing US prices. Nor is a US that cuts back on import purchases more rapidly in the interest of any export-oriented developing economy – including China.

Browser Wars

Microsoft's new browser will have the ability to block Google ads. Google's answer to this challenge to their business? Release a browser of their own and try to bypass IE altogether:

A fresh take on the browser, Google Blog: At Google, we have a saying: “launch early and iterate.” While this approach is usually limited to our engineers, it apparently applies to our mailroom as well! As you may have read in the blogosphere, we hit "send" a bit early on a comic book introducing our new open source browser, Google Chrome. We will be launching the beta version of Google Chrome tomorrow in more than 100 countries. ...

[W]e began seriously thinking about what kind of browser could exist if we started from scratch and built on the best elements out there. We realized that the web had evolved from mainly simple text pages to rich, interactive applications and that we needed to completely rethink the browser. What we really needed was not just a browser, but also a modern platform for web pages and applications, and that's what we set out to build.

On the surface, we designed a browser window that is streamlined and simple. To most people, it isn't the browser that matters. It's only a tool to run the important stuff -- the pages, sites and applications that make up the web. Like the classic Google homepage, Google Chrome is clean and fast. ...

Under the hood, we were able to build the foundation of a browser that runs today's complex web applications much better. By keeping each tab in an isolated "sandbox", we were able to prevent one tab from crashing another and provide improved protection from rogue sites. We improved speed and responsiveness across the board. We also built a more powerful JavaScript engine, V8, to power the next generation of web applications that aren't even possible in today's browsers.

This is just the beginning -- Google Chrome is far from done. We're releasing this beta for Windows... We're hard at work building versions for Mac and Linux too...

We owe a great debt to many open source projects, ... and in that spirit, we are making all of our code open source as well. ...

Adam Smith and the Division of Labor

Gavin Kennedy at Adam Smith's Lost Legacy says Adam Smith was "on the side of the labourers on the issues that mattered most to them: higher wages are preferred to lower wages, a point worth remembering, I think, on Labour Day.":

Adam Smith and the Importance of the Liberating Force of the Division of Labour, by Gavin Kennedy:  Daniel Bulone writes in Tunnel Vision (‘Observations on Exchange’), 1 September: “Adam Smith: Machine-Minded Misanthrope or Merry Man of Manufacture?” Here:

“Adam Smith lived in a time when industry was on the verge of revolution. A unique relationship between workers and machines had begun, one in which the two worked together, in an almost equal partnership, to produce marketable goods. This leads one to wonder if the newfound brotherhood of man and machine affected Smith’s writings. What is more, did Smith see people as a means toward an end? It is hard to avoid thinking as much, when he speaks of workers in terms of what they can produce. ... It is true that he was a scientist, whose job was to quantify the activities of workers. However, the way he speaks of the division of labor makes it seem as though it is a way to transcend the bothersome tendencies of humanity. ... Essentially, Smith’s process involves the greater value of the whole above that of the individual. According to him, people achieve maximum efficiency when they are cogs in a vast network of industry.

In addition to thinking of people as commodities, he does not have a particularly sunny view of humanity. When speaking of a common workman in WON, Smith states that the problem of too many tasks at once “renders him almost always slothful and lazy, and incapable of any vigorous application.” ...

Comment
This is rather a sad way to look at Adam Smith on the division of labour.

Paul Krugman: John, Don’t Go

What's wrong with pictures and photo-ops?:

John, Don’t Go, by Paul Krugman, Commentary, NY Times: It’s an ill wind that blows nobody good. Three years after Hurricane Katrina, another storm is heading for the Gulf Coast — and this has given Republicans a reason to cancel President Bush’s scheduled appearance at their national convention. The party can thus avoid reminding voters that the last man they placed in the White House did such a heckuva job that he scored the highest disapproval ratings ever recorded.

Instead, Mr. Bush is playing Commander in Chief. On Sunday morning the White House Web site featured photos of the president talking to Gulf state governors ... while ostentatiously clutching a red folder labeled “Classified.” ...

What’s wrong with this picture?

Let’s start with that red folder. Assuming that the folder contained something other than scrap paper, is the planned response to a hurricane a state secret? Are we worried that tropical storm systems will discover our weak points? Are we fighting a Global War on Weather?

Actually, that’s not quite as funny as it sounds. ...[D]aily briefings on preparations for Gustav, which should be coming from the Federal Emergency Management Agency ... have been coming, instead, from the U.S. military’s Northern Command.

It’s not hard to see why. Top positions at FEMA are no longer held by obviously unqualified political hacks and cronies. But a recent report by the inspector general of the Department of Homeland Security said that the agency has made only “limited progress” ... in its ability to coordinate the response to a crisis. So FEMA still isn’t up to carrying out its principal task.

That’s no accident. ... Simply put, when the government is run by a political party committed to the belief that government is always the problem, never the solution, that belief tends to become a self-fulfilling prophecy. ... Three years after Katrina, and a year past a Congressional deadline, FEMA still doesn’t have a strategy for housing disaster victims.

Which brings us back to the politics of the current storm.

Earlier this year Mr. McCain, as part of his strategy of distancing himself from the current administration, condemned Mr. Bush’s response to Katrina. If he’d been president at the time, he says, “I would’ve landed my airplane at the nearest Air Force base and come over personally.”

Um, that completely misses the point. The problem with the Bush administration’s response to Katrina wasn’t the president’s failure to show up promptly for his photo op. It was the failure of FEMA and other degraded agencies to show up promptly with food, water and first aid.

And let’s hope that Mr. McCain doesn’t jet into the disaster area in Gustav’s aftermath. The candidate’s presence wouldn’t do anything to help the area recover. It would, however, tie up air traffic and disrupt relief efforts, just as Mr. Bush did when he flew into New Orleans to congratulate Brownie... Remember the firefighters who volunteered to help Katrina’s victims, only to find that their first job was to stand next to Mr. Bush while the cameras rolled?

To be fair, Republican plans to deal with Gustav by turning their convention into a “service event,” perhaps a telethon to raise funds for victims, are a good idea. So is the Obama campaign’s plan to mobilize its e-mail list to send aid and volunteers. But personal, voluntary aid is no substitute for an effective public response to disaster.

What we really need is a government that works, because it’s run by people who understand that sometimes government is the solution, after all. And that seems to be something undreamed of in either Mr. Bush’s or Mr. McCain’s philosophy.