Wednesday, April 1, 2015

Guy Standing Out In His Field


Guy Standing on basic income:
A basic income would help people be more rational, more long-term in their outlook, and more prepared to take entrepreneurial risk. 
It would not reduce labor supply. This was shown by our pilots in India, in which we were able to provide over 6,000 men, women and children with a basic income for 18 months and monitor what happened by comparison with a larger number not provided with one, through a randomized control trial. It has also been shown in experiments in the US, Canada and several European countries.
The simple fact is that people with basic security work harder and more productively, not less
A commenter:
NO. I don’t know how you set up that experiment in India, but common sense says the conclusion is wrong. 
Proof (if any was needed) that "el mayor necio es el que no se lo piensa y a todos los otros define."

Guy Standing on a lump of labor:
There is an adage in economics known as ‘the lump of labor fallacy’. It is that technological change is destroying jobs and generating rising unemployment. It rests on an image of a finite number of jobs.


This is nonsense. What is happening is more subtle and potentially liberating, but also potentially generating a dystopia of socially unsustainable inequality, in which a growing share of the population will be mired in chronic insecurity, through no fault of their own.
Who is the greater fool: smart Guy with his condescending "subtlety" or stupid guy with his anti-evidence "common sense"? My middle-sized facts post the other day started out a couple of weeks ago with a somewhat different meditation on Dr. Pepper's inquiry into the limits of unknowing.

What I was thinking about was the practice of attributing "assumptions" to people based on hypothetical models that they are unlikely to have ever entertained. The proverbial "image of a finite number of job" -- whether fallacious or not -- would only be meaningful in the context of some kind of a simple theoretical model of the job market with interactions between supply and demand. As rudimentary as one might imagine such a model, it is likely to be as alien to "the common man" as Fred Flintstone's car would to prehistoric Homo sapiens.

The image of a finite number of jobs contains an amusing substitution. Someone must have thought a fixed amount of work to be done sounded too unbelievable to attribute to people and figured that finite would add credibility. What then is the meaning of an infinite number of jobs? If that is subtle, the Sandwichman is a brontosaurus-burger.

Guy standing on top of an airplane:




CCI. Son tontos todos los que lo parecen y la mitad de los que no lo parecen.

Alzóse con el mundo la necedad, y si hay algo de sabiduría, es estulticia con la del cielo; pero el mayor necio es el que no se lo piensa y a todos los otros define. Para ser sabio no basta parecerlo, menos parecérselo: aquel sabe que piensa que no sabe, y aquel no ve que no ve que los otros ven. Con estar todo el mundo lleno de necios, ninguno hay que se lo piense, ni aun lo recele.

Endogenous Growth on Tin-Pan Alley

I was talking to a class about the growth of knowledge, and the trade-off , in protecting intellectual property, between creating incentives for new discoveries, and  maximizing the effect of new knowledge as input for further knowledge. As an example of this last, "standing-on-shoulders" effect, I mentioned the astonishing number of great jazz compositions that have been based on the chord changes of "I Got Rhythm." But instead of attributing the song to Gershwin, correctly, or even to Irving Berlin, who is at least a songwriter, I attributed it to ISAIAH Berlin. Oy! You don't know about Berlin's residence on Tin-Pan Alley? Well, who do you think wrote

Two Concepts of Blue Skies
A Pretty Girl is Like a Hedgehog - Unless She's Like a Fox
Alexander Herzen's  Ragtag Band,

inter alia?

Monday, March 30, 2015

Middle-Sized Facts vs. IS-LMist Fundamentalism

"So I don't care whether Hicksian IS-LM is Keynesian in the sense that Keynes himself would have approved of it, and neither should you. What you should ask is whether that approach has proved useful -- and whether the critics have something better to offer." -- Paul Krugman, "Unreal Keynesians"
The issue, of course, is not whether 'the master' would have approved of the IS-LM gadget but whether it represents an analytical advance or a regression from the insights that Keynes achieved. In a 1980 "explanation," Hicks conceded that "as time has gone on, I have myself become increasingly dissatisfied with it." In a commentary on Hicks's explanation, though, G.L.S. Shackle was less ambivalent. I have selected and re-arranged passages from Shackle's commentary to highlight his central point -- that uncertainty and equilibrium are fundamentally incompatible concepts.
The one big thing in Keynes' ultimate conception is our unknowledge of what will create itself in time-to-come. "We simply do not know." The author of A Treatise on Probability expressly rejects the notion that probability can turn this unknowledge into its opposite. When we accept this view, the possibility of involuntary unemployment becomes self-evident. 
Sir John Hicks' paper was the first presentation of IS-LM and has been for forty and more years the most famous and the most influential interpretation of Keynes. Central and essential to its argument is a notion of equilibrium. 
Sir John still does not seem to me to acknowledge the essential point: the elemental core of Keynes' conception of economic society is uncertain expectation, and uncertain expectation is wholly incompatible and in conflict with the notion of equilibrium. 
In the literature of economics the word equilibrium covers a multitude of ideas and of vacuous substitutes for thought. Its pervasive presence and the ascendancy its serious meanings have exercised show plainly that it "does something" for the economic theoretician. What does it do? It enables him to exhibit the economic world as determinate, explicable, calculable, and even predictable. Equilibrium is orderliness, harmony, the advancement of one's own interest by serving that of others. Equilibrium is interactive rationality, the recognition that society is an organism. Above all, it is the necessary condition, the basis and sanction of proof. Pride in proof is legitimate. Proof is certainty, an end to debate, and it is more, in the scale of values and sensibilities of many of us. Proof is beauty. If economic theory is to validate its claim to be a deductive system, a science, then the equilibrium idea is indispensable. But proof can exist only in a closed world. It depends upon "givens." If we are not supplied with "givens," and if we are not defended from things not given, of which we were not told, things which can blow in on us in the cold draught from time-to-come, there is no proving things.
Shackle doesn't go far enough. Well, he probably goes far enough in outlining the incompatibility of the notion of equilibrium with the conception of uncertain expectations. But I think it is possible to go a further step in comprehending the incompatibility of the notion of equilibrium with itself. That is to say, the essential incongruity of the notion of equilibrium. 

In an appendix to Significance and Basic Postulates of Economic Theory, T.W. Hutchison admonished, "It is high time to put these theories [laissez faire and equilibrium doctrines] firmly back in their place as Utopian constructions." He cited S. Bauer's 1931 article, "Origine utopique et métaphorique de la théorie du “laissez faire” et de l’équilibre naturel."

Prominent in Bauer's discussion of the origins of the notions of laissez faire and equilibrium is the role of Baltasar Gracian's Oráculo Manual -- which was translated into French by Amelot de la Houssaie in 1684 -- in popularizing both the notion and the term, laissez faire. Pierre le Pesant Boisguilbert is credited with introducing the term into political economic thought in a book published in 1707. Below is the maxim extolling the art of leaving things alone:


Where this story of equilibrium starts to get convoluted is in the Spanish Baroque's philosophical tradition of radical skepticism that Gracian exemplified. In the introduction to his English translation of Gracian's Pocket Oracle, Jeremy Robbins describes the "world of deception and illusion" central to Baroque thought:
Gracián posits a world of deception and illusion, in which appearances predominate and malice and cunning are omnipresent. Hence the distrust, pessimism and misanthropy that characterize his world-view. The key concept here is deceit (engaño): this covers, for Gracián, not simply the deception of one individual by another, but our self-deception as to the true nature and value of the world, and hence our deception by the world. It is a term at once moral and epistemological: to fail to know the world for what it is condemns us to moral error and to failure. Because of our tendency to accept appearances and to follow our desires, passions and emotions, we are mired in a world of deceit. There is consequently an urgent need for disillusionment (desengaño), the other key concept of the Spanish Baroque, For Gracián and his contemporaries, disillusionment means the realization of the true worth of things, seeing them as they really are: in essence, that this world and all within it is worthless. For many writers, this means explicitly viewing things not from a human or worldly perspective, but from the perspective of eternity, on the grounds that the here and now, being transient, amounts to mere appearance, true reality being what awaits us after death.
Robbins is the author of an introduction to seventeenth century Spanish literature titled The Challenges of Uncertainty, in which he argues that Spanish literature, "creatively responded to the unprecedented sense of uncertainty fostered by developments across Europe... it was above all this scepticism which led Spaniards to employ literature and art to question the boundaries of reality and illusion." 

Something weird is going on here. An aesthetic response to uncertainty about the bounds of reality and illusion has been adapted and transformed into a fundamental assumption about the nature of the the world. Uncertainty has been overcome by... an imaginary Utopia,

In "The Quest for Ignorance or the Reasonable Limits of Skepticism" Stephen Pepper argued that "Utter skepticism -- a skepticism void of all knowledge -- could not know itself and stands refuted in its very utterance." There are limits to what we cannot know. The Utopia of equilibrium is not simply incompatible with uncertainty -- it is an inevitable symptom of unreasonable uncertainty. Pepper asked, "How little can we know? What is the maximum of a reasonable unbelief?" His answer relied on the acknowledgement, first, of what he called "middle-sized facts":
These middle-sized facts are the matrix of all knowing. We are so immersed in them all the day long that we ordinarily miss their significance. The common man does not think about them, because he is moving among them; and the specialist does not think about them, because he has made assumptions that raise him above them. They get left out in most discussions of knowledge and fact. But they constitute the lowest limit of skepticism.

Monetary Policy: Bernanke and Yellen v. Taylor

The economist bloggers should all rejoice the fact that Ben Bernanke has joined us. His first post is excellent and I will present a key quote shortly. But let me express my main frustration with how some people are using the Taylor rule versus something that Janet Yellen recently noted:
Even with core inflation running below the Committee’s 2 percent objective, Taylor’s rule now calls for the federal funds rate to be well above zero if the unemployment rate is currently judged to be close to its normal longer-run level and the “normal” level of the real federal funds rate is currently close to its historical average. But the prescription offered by the Taylor rule changes significantly if one instead assumes, as I do, that appreciable slack still remains in the labor market, and that the economy’s equilibrium real federal funds rate–that is, the real rate consistent with the economy achieving maximum employment and price stability over the medium term–is currently quite low by historical standards. Under assumptions that I consider more realistic under present circumstances, the same rules call for the federal funds rate to be close to zero
Taylor has been arguing for some time that monetary policy is keeping interest rates too low for too long. OK, if one believes were are near full employment and one believes that Wicksellian natural interest rate is still 2 percent, this follows. But many of us – including Yellen - reject both premises. What is Taylor’s response?
So the main argument is that if one replaces the equilibrium federal funds rate of 2% in the Taylor rule with 0%, then the recommended setting for the funds rate declines by two percentage points. The additional slack due to a lower natural rate of unemployment is much less important. But little or no rationale is given for slashing the equilibrium interest rate from 2% percent to 0%. She simply says “some statistical models suggest” it. In my view, there is little evidence supporting it, but this is a huge controversial issue, deserving a lot of explanation and research which I hope the Fed is doing or planning to do.
Might I suggest Taylor start his research by reading Bernanke’s first blog post:
Low interest rates are not a short-term aberration, but part of a long-term trend ... The real interest rate is most relevant for capital investment decisions, for example. The Fed’s ability to affect real rates of return, especially longer-term real rates, is transitory and limited. Except in the short run, real interest rates are determined by a wide range of economic factors, including prospects for economic growth—not by the Fed. To understand why this is so, it helps to introduce the concept of the equilibrium real interest rate (sometimes called the Wicksellian interest rate, after the late-nineteenth- and early twentieth-century Swedish economist Knut Wicksell). The equilibrium interest rate is the real interest rate consistent with full employment of labor and capital resources, perhaps after some period of adjustment. Many factors affect the equilibrium rate, which can and does change over time. In a rapidly growing, dynamic economy, we would expect the equilibrium interest rate to be high, all else equal, reflecting the high prospective return on capital investments. In a slowly growing or recessionary economy, the equilibrium real rate is likely to be low, since investment opportunities are limited and relatively unprofitable. Government spending and taxation policies also affect the equilibrium real rate: Large deficits will tend to increase the equilibrium real rate (again, all else equal), because government borrowing diverts savings away from private investment.
The converse is true as the unwise fiscal austerity evidenced both in the U.S. and Europe is driving down the Wicksellian natural rate. Has John Taylor not been paying attention to the real world over the past several years? Fortunately for us, Ben Bernanke and Janet Yellen have been.

Sunday, March 29, 2015

Is the Economic System Self-Adjusting?

"Second — and this plays a surprisingly big role in my own pedagogical thinking — we do want, somewhere along the way, to get across the notion of the self-correcting economy, the notion that in the long run, we may all be dead, but that we also have a tendency to return to full employment via price flexibility." -- Paul Krugman, June 2, 2013
JOHN MAYNARD KEYNES, from a 1934 BBC radio address*
I was asked recently to take part in a discussion among English economists on the problem of poverty in the midst of potential plenty, which none of us can deny is the outstanding conundrum of today. We all agreed that, whatever the best remedy may be, we must reject all those alleged remedies that consist, in effect, in getting rid of the plenty. It may be true, for various reasons, that as the potential plenty increases, the problem of getting the fruits of it distributed to the great body of consumers will present increasing difficulties. But it is to the analysis and solution of these difficulties that we must direct our minds. To seek an escape by making the productive machine less productive must be wrong. I often find myself in favor of measures to restrict output as a temporary palliative or to meet an emergency. But the temper of mind that turns too easily to restriction is dangerous, for it has nothing useful to contribute to the permanent solution. But this is another way of saying that we must not regard the conditions of supply -— that is to say, our facilities to produce -— as being the fundamental source of our troubles. And, if this is agreed, it seems to follow that it is the conditions of demand that our diagnosis must search and probe for the explanation.

Thursday, March 26, 2015

George Will on Free Trade and the Price of a Starbucks Latte

Dean Baker reads George Will so we don’t have to:
Will seems to think that we could not get people to work hard to master skills or to be great innovators if they didn't have the prospect of earning billions or tens of billions of dollars. But if we look back through history we can identify an enormous number of tremendously talented and creative individuals who did not get fabulously wealthy or even have any plausible hope of getting fabulously wealthy.
Dean is more patient than I am as I could not get past Will’s first paragraph:
Every day the Chinese go to work, Americans get a raise: Chinese workers, many earning each day about what Americans spend on a Starbucks latte, produce apparel, appliances and other stuff cheaply, thereby enlarging Americans’ disposable income. Americans similarly get a raise when they shop at the stores that made Sam Walton a billionaire.
Ah yes – the canard that all Americans benefit from free trade with China. It is true that we get lower prices for apparel but has Will ever heard of the Stopler-Samuelson theorem? As prices fall for imported products, the wages of workers in the importing competing sector fall even more. And such not everyone gains from free trade. Also - is Will unaware that the wages of Chinese workers have risen considerably from the days when they made only $0.60 an hour? Table 1 of this excellent discussion of how apparel wages internationally evolved from 2001 to 2011 noted how Chinese workers were getting $114.86 per month in 2001 but their real wage rose to $324.90. Of course, these figures were in 2001$ and the consumer price index has risen by 34% since then. So either Mr. Will is unaware of the real wage growth for Chinese apparel workers over the past several years or he does not know how to shop for coffee.

Wednesday, March 25, 2015

What is a "Thought Experiment"?

This is a thought experiment.

A new take on the gold standard?


Keynes, in his Treatise on Money, in a footnote at the beginning of Chapter 35, referring to the love of money, as a footnote pointing to the work of the Hungarian psychoanalyst, Sandor Ferenczi, who was famous for his work on that subject. Ferenczi argued that the love of money was a continuation of infants’ fascination with their own feces.
 
Ferenczi, Sandor. 1914. “The Ontogenesis of Interest in Money.” In Sex in Psycho-Analysis (Contributions to Psycho-Analysis) (NY: Basic Books, 1950): pp. 319-31.
 
I turns out that Keynes and Ferenczi were up to something.
 
Devlin, Hannah. 2015. “Gold in faeces is worth millions and could save the environment.” The Guardian (25 March). http://www.theguardian.com/science/2015/mar/23/gold-in-faeces-worth-millions-save-environment.
 
“Sewage sludge contains traces of gold, silver and platinum at levels that would be seen as commercially viable by traditional prospectors. “The gold we found was at the level of a minimal mineral deposit,” said Kathleen Smith…
 

Tuesday, March 24, 2015

Adam Davidson NYT Magazine Argument Clinic: Lumps of Straw

Correcting "Debunking the Myth of the Job-Stealing Immigrant" by Adam Davidson:
And yet the economic benefits of immigration may be the ­most ­settled fact in economics. A recent University of Chicago poll of leading economists could not find a single one* who rejected the proposition.... Rationally speaking, we should take in far more immigrants than we currently do. 
So why don’t we open up? The chief logical mistake we make attribute to our opponents is something called the Lump of Labor Straw Fallacy: the erroneous notion well-worn straw man that [they think] there is only so much work to be done and that no one can get a job without taking one from someone else. It’s an understandable unmitigated   assumption red herring. After all, with other types of market transactions argument, when the supply goes we make something up, the price falls it's true. If there were suddenly a whole lot more oranges, we’d expect the price of oranges to fall or the number of oranges that went uneaten to surge. If Adam Davidson was an orange, we'd expect stale boilerplate canards to be high in vitamin C.
I guess that settles it. More leading economists smoke Camels than any other cigarette. The logic is impeccable:
  1. Put your argument here.
  2. Replace with a lump of straw.
  3. Knock down straw.
  4. Q.E.D. your argument is wrong.
  5. My argument is right.
  6. Economists agree.
  7. Therefore, it's a fact!
  8. Publish findings in New York Times Magazine.

* Four is "not a single one"? Well, I suppose technically... Or perhaps Davidson meant those who rejected the proposition were married? Several of the "uncertain" economists left comments indicating the question was too vague to answer but suggesting disagreement if the question was clearer. The same number of economists, four (or "not a single one"?), disagreed with question B, that "many low-skilled American workers would be substantially worse off..."

S.H.A.M.E. on Adam Davidson.

Monday, March 23, 2015

WaPo's Fred Hiatt Goes After Old People Yet Again

With Dean Baker on leave and Bruce Webb and other usual suspects laying low, I guess it is up to me to dump on the Washington Post's Editorial Page Editor, Fred Hiatt, for his latest assault on entitlement programs for  the American elderly, something that he is the ringleader of at the WaPo editorial page, leading such eager followers as Robert J. Samuelson and Ruth Marcus, among others.  Much of today's column, "Never-Compromise wins again: New Democrats are being driven to extreme positions," is old hysterical boilerplate, but there are some new themes.  One is to dump on Congressional Democrats for supporting expanding Social Security, which is the "extreme position" he denounces them for, and is something he clearly never expected to see.  The other is to see how he adjusts some of his standard lines in the face of this shifting of the political ground from trying to push cuts in Social Security (and Medicare) to trying to oppose efforts to expand its payments.  Of course, his main line is to compare unfavorably the Congressional Dems to the GOPsters as sources of "gridlock." If only they would get on with good old Bowles-Simpson, all would be right in the VSP world!

In the face of this push to expand Social Security benefits, with Maryland's Rep. Chris Van Hollen being the main object of Hiatt's wrath (and Van Hollen is accused of moving to this position from his supposedly responsible previous position favoring Bowles-Simpson for, ack!, political reasons as he is running to replace Barbara Milkuski in the Senate, and, horrors!, he has figured out that expanding Social Security benefits might be,  awful!, popular with Dem primary voters in MD), Hiatt softens up just a bit on his usual criticisms of Social Security.  In particular, for the first time I have ever seen, he admits that "It is by no means lavish; the average monthly retirement benefits is about $1,300.  It must be protected."  And, he admits that it is "an essential and successful program that has lifted and continues to lift millions of elderly Americans out of poverty."  Wow!  This is the first time I have seen Hiatt say anything even remotely as positive as this about the program.  But, hey, nothing like the earth moving under your feet politically to bring out the recognition that the program is not just some awful nightmare of fiscal disaster.

But of course, it still is such a disaster in his eyes, even if he now admits it has some virtues.  So, he informs us that "But those monthly benefits are paid out of the taxes of working Americans, of whom there were more  than five for every beneficiary in 1960.  Today there are fewer than three workers for every pensioner. In 2030, the ratio will be two to one."  Well.  So those benefits are coming out of the hides of the virtuous younger workers!  That the recipients have paid into the system in the past is not mentioned.

This demographic pitch is the main negative argument he provides, aside from his general whining about how the Dems are now contributing to  gridlock and not accepting the sublime VSP wisdom of  Bowles-Simpson.  This is old stuff, but all the more reason for pointing out how silly it is.  Presented this way to someone never thinking about the issue before or not knowing much,this forecasted change can sound pretty scary.  However, what Hiatt and others pushing this line never mention is that this is not bad when one compares the US with other high income nations.  Indeed, we have among the best demographics of any of these nations for such programs.  That ratio we shall have in 2030 is what one finds already in Germany, where the budget is not in bad shape, people can retire earlier than in the US, and the benefits are higher than in the US.  This is something to panic and freak out about?  Obviously not, but one will not hear this from Hiatt and his flunkies.

Barkley Rosser

Sunday, March 22, 2015

Janet Yellen Achieves Greenspanese

It has finally arrived, the moment where Fed Chair Janet Yellen shows she has the stuff, the language stuff, which is not surprising given that as Vice Chair under Bernanke she was leading the effort to figure out how the Fed should communicate with the rest of the word.  And the answer is, as it always has, as confusingly as possible.

The moment came when after noting that "patient" had been removed from the FOMC's officially written communication, this did not mean "that the Fed has become impatient."  The markets had been roiling and boiling, but this Greenspanish remark quickly calmed them.  Confusion reigns and all is well.

Yellen plays the dialectical tension between openness and opacity better than any Fed Chair yet.  Of course, in the ancient of days, the Fed made its decisions secretly and that was that.  Nobody complained, or not too  loudly or effectively or only occasionally.  But then, in the 1970s it came to pass that Congress made Fed Chairs testify periodically on what they were up to, although FOMC meetings continued to be secret with only delayed reports of what they were up to.  Arthur Burns in his testimonies to Congress would assist his obfuscations by smoking a gnarled pipe, which, with his Hoover era appearence, would make him positively owlish as he would disappear into clouds of smoke.  For Volcker, it was massive cigars that would accompany his massive frame, but the disappearence into smoke would provide the appropriate hint of wizadry, as if Fed Chairs were really Tolkien wizards arguing over golden rings of power, if not over gold itself, long shorn of its divine authority that it had from the days of Egyptian pharaohs when its yellow colar and inertness supposedly represented the eternal sunshine associated with Pharaonic divinity.

Since then the thrust has been for ever more openness and instant press conferences, not to mention the disappearance of smoke, even the cigarettes of Greenspan, although he perfected the language of obfuscation that led to not needing the smoke, if still perhaps the mirrors.  Bernanke never could quite measure up to the Greenspanianly eloquent incoherence, although he learned quickly to avoid rattling the markets with overly open remarks about hard facts. But, with this performance, Janet Yellen shows she has transcended Bernanke, and may have even shown how to be obfuscatory and brief all at the same time, thus achieving a truly dialectical synthesis between openness and opacity.

Barkley Rosser

Thursday, March 19, 2015

Do we all share the same future as Greece?

The general public are hearing of the phenomenon of the 'bankrupt nation' frequently these days.  It's an interesting mental abstraction that conjures up images of wages being cut in half, public servants being laid off en-masse, interest rates on housing and business loans climbing through the roof, people going hungry, etc.

On the other hand, an incredible juxtaposition is revealed as banks, whilst in reality being functionally bankrupt are 'bailed out' by the very governments now described as insolvent!  

What's going on? Clearly sources of international finance have become much more important than either national economies and the lives of people who inhabit those countries. How did this extraordinary situation occur?....
Continued at:  Do we all share the same future as Greece?

Wednesday, March 18, 2015

Grexit, from Threat to Promise

Here are the overriding facts that are unlikely to change without a change in policy:

1. Greece is in the grips of an economic and humanitarian crisis.  In fact, unless there is a substantial change in course, it runs the risk of becoming a failed state altogether.

2. Greek sovereign debt is not payable.  Its society will collapse first.

3. There does not exist the political will in Europe for a transfer union that mutualizes the obligations and needs of Greece on a permanent basis.  This is in contrast, for instance, to the United States, in which most sovereign debt is mutualized and interstate transfers occur on a routine basis.  A transfer union might be a first-best solution in Europe, but it is politically infeasible.

4. Under current circumstances, Grexit would be experienced in Greece, and possibly through much of Europe, as a catastrophe.  A hurriedly introduced drachma would be unanchored, and the redenomination of contracts would be chaotic and disruptive of ordinary business.  Greek savings would either flee or be largely wiped out, with dangerous political consequences.

5. Nevertheless, Greece was a poor candidate to enter the eurozone when it did and is a poor candidate to remain in the zone today.  Above all, it lacks a sufficiently large, diversified and productive export sector to permit growth under a fixed exchange rate without the accumulation of unsustainable current account imbalances.

6. Greece is a small country from an economic perspective, and its political-economic challenges are unique.  Properly managed, Grexit does not need to lead to similar policies for larger countries, like Spain and Italy, whose imbalances are not structural in Greece’s sense.

7. Finally, the political evolution of the antagonism between Greece and the creditor countries is pernicious.  The nationalist rhetoric of victimization and resentment, wherever it occurs, is a proven threat to peace and international cooperation.  This alone should be reason enough to change course.

At present Grexit exists as a threat wielded by both sides to extract concessions from the other.  It is a threat to the extent it would be catastrophic, either for Greece in the form of economic chaos or for Europe in the form of contagion.  Nevertheless, properly prepared, Grexit could be a mutually beneficial solution.

What would proper preparation look like?  Here is the sketch of a plan:

First, Grexit would be proposed as one element in a comprehensive solution whose political premise is substantial generosity on the part of the creditor countries with the understanding that this is strictly a one-time event.

Second, as a precondition for Grexit, the existing sovereign debt of Greece would be largely written off, with a residual obligation (under 50% of GDP) clearly consistent with favorable growth prospects.  This may require Europe to assume some degree of obligation for Greece’s debts to the IMF.

Third, the ECB would provide temporary euro reserves to the Bank of Greece in order to support a stable transition back to the drachma.  This could take the form of a swap line which would be resolved and terminated by some target date several years after Greece’s exit from the euro.

Fourth, the mandatory redenomination of contracts and financial assets whose payment streams would be in drachmas would be permitted to occur over a suitable time frame, such as a year.  In other words, just as with eurozone accession, eurozone exit would involve a period of dual currencies with strict parity in order to facilitate orderly redenomination.  The commitment of the ECB to support the drachma well beyond the period of redenomination would underwrite this process.

The end result would be an economically sovereign Greece and a eurozone no longer obligated to finance it.  Both sides would benefit from better conditions for economic growth and reduced political stress.  In fact, it is probable that the large-scale economic restructuring needed in Greece can be accomplished only under circumstances of fundamental sovereignty and freedom that allow experiment with deep reforms.

Such a Grexit should be viewed as a solution incorporating goodwill on all sides, whose goal is progress and not punishment.  It would not be accompanied by expulsion from the EU or any other retaliatory measure.  After a suitable period of time, Greece could reapply for eurozone membership if it chooses without prejudice—either against or for accession.

UPDATE: I have left out perhaps the most difficult aspect of a gracefully managed Grexit, the issuance of new Greek sovereign debt during the dual currency period.  The more such debt is issued, the greater is the ECB’s de facto commitment to the drachma.  The typical eurozone solution would be to impose an upper bound on Greek deficits over the period, probably adhering to the bright line of the Stability and Growth (sic) Pact, in exchange for drachma support.  This would not be ideal, but under the circumstances it is probably necessary for selling the deal.  And Greece would always have the option of foregoing the support if it had confidence in its monetary and fiscal space.

Monday, March 16, 2015

Simple Models

Take a very simple example. Labour is the only input, there's a constant returns technology, and labour produces one apple per hour. 
Start at full employment, where everyone works 40 hours per week, and nobody wants to work any more than 40 hours. ...
The first thing I notice about such simple models is that in such a world, people would have no need of "simple models" to help them understand what is going on. In short, the "simple model" thought experiment has no cognitive dimension.

The End.

(Unless it's an economist trying to sound like a physicist)