Economist's View - 6 new articles
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 â€" this time â€" 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 inflationâ€� measures show no sign of accelerating inflation either.
The United States is experiencing a ... financial meltdown... In normal times, the Fed’s response â€" extremely monetary stimulus â€" 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 â€" 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.
Smith's approach, as a moral philosopher, was 'to do nothing but observe everything', and in his case he took the long-view of history to explain how and why a section of humanity in Europe had created societies somewhat advantageous to the spread of opulence compared to the stagnant 18th-century societies of India and China (the latter in the 15th century was on the verge of becoming the world's leading economy – it had the technology - until it deliberately aborted its development on the instructions of a totalitarian emperor by cutting all links with other civilizations).
Also, compared to the earlier societies ('the Age of Hunters') of North and South America, the 'meanest labourer' in 18th-century Scotland was considerably richer in his annual consumption of goods than the 'richest' Indian (and African) Prince (Wealth Of Nations, I.i.11: pp 23-4). The difference in living standards (appalling as they may appear to appear to modern consumers) was down to the enhanced divisions of labour in Europe.
Instead of being relatively independent of others – each hunter going into the forest and with his own tools catching something for his family to eat, building his own shelter for the night and covering himself and his families with animal skins – the initial division of labour came from the propensity to truck, barter, and exchange one thing for another. Some people made arrow heads and flights for their arrows, others exchanged game for arrow heads, and so on. In doing so they became less independent and more dependent on their fellows and the mothers of their children.
The 'pin factory' by no means is the most important aspect of the division of labour in Adam Smith's view, though it is important to indicate the productivity consequences of co-operative labour, which is a singular matter of importance for the spread of opulence, especially among the lowest paid. ...
Indeed, it is in productivity gains all along a final product's supply chain, and the many separate supply chains connected to points on it, that is main the source of economic growth and the spread of opulence, which constantly works away under the entrepreneurial drive and technological enhancement brought about by thousands of others.
Allyn Young considered that
"Adam Smith's famous theorem that the division of labour depends upon the extent of the market … I have always thought, is one of the most illuminating and fruitful generalisations which can be found anywhere in the whole literature of economics".
This observation is particularly authoritative today because Young's 1928 article in The Economic Journal article has recently promoted developments in modern growth theory away from its early versions (Harrod-Domar, Solow) towards recognizing increasing returns. Smith went well beyond the restricted single-product example of a pin factory, with which most people associate his name, in his crucial example of the 'multiplicity of trades' in the making of a common labourer's woollen coat, the 'produce of the joint labour of a great number of workmen', during which he displays emphatic and unusual excitement by placing exclamation marks at the end of three consecutive sentences, the last concluding: 'What a variety of labour too is necessary in order to produce the tools of the meanest of those workmen!'(WN p 23) ... The more developed the society, the more interconnected are the separate markets for each good or service. It is the extent of the market that drives the division of labour and the division of labour that drives the extent of the market. By considering only the 'pin factory' example of an aspect of the division of labour, Daniel Bulone (like many others before him) may have missed entirely the grand sweep of Adam Smith's analysis, as well has missing the essential humanity of his outlook on the pressing need to liberate the labouring poor from drudgery of extremely low incomes. The latter paragraphs of his post on Smith the 'cynic', and so on, are particularly unhelpful of understanding his general disposition that high wages are better for all concerned than low wages:
Is this improvement in the circumstances of the lower ranks of the people to be regarded as an advantage or as an inconveniency to the society?*38 The answer seems at first sight abundantly plain. Servants, labourers and workmen of different kinds, make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, cloath and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed and lodged… (WN I.viii.36: p 96)
And:
…The liberal reward of labour, as it encourages the propagation, so it increases the industry of the common people. The wages of labour are the encouragement of industry, which, like every other human quality, improves in proportion to the encouragement it receives. A plentiful subsistence increases the bodily strength of the labourer, and the comfortable hope of bettering his condition, and of ending his days perhaps in ease and plenty, animates him to exert that strength to the utmost. Where wages are high, accordingly, we shall always find the workmen more active, diligent, and expeditious, than where they are low (WN I.viii.44: p 99).
I would have thought these sentiments would place Adam Smith 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.
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.
"Bowling Alone Because the Team Got Downsized"
According to this research, a spell of unemployment makes a worker less likely to engage in social activities. The cross-sectional results - examining how the degree of social involvement varies with the number of unemployment spells across workers at a point in time - raise questions of causality (does some third variable make worker less socially engaged and more likely to get fired), but the time-series component of the panel where individual workers are traced over time and they tend to be less socially involved after being fired than before, an effect that persists for the rest of their lives, is more convincing:
Bowling alone because the team got downsized, EurekAlert: The pain of downsizing extends far beyond laid off workers and the people who depend on their paychecks, according to a new ... study
Even a single involuntary displacement has a lasting impact on a worker's inclination to volunteer and participate in a whole range of social and community groups and organizations...
"What we find is that even just one disruption in employment makes workers significantly less likely to participate in a whole range of social activities — from joining book clubs to participating in the PTA and supporting charities," said Jennie E. Brand, a UCLA sociologist and the study's lead author. "After being laid off or downsized, workers are less likely to give back to their community."
The ... research found that workers who had experienced just one involuntary disruption in their employment status were 35% less likely to be involved in their communities than their counterparts who had never experienced a job loss due to layoff, downsizing or restructuring, or a business closing or relocating. Moreover, the exodus from community involvement continued ... for the rest of the workers' lives.
"Social engagement often involves an element of social trust and a sense that things are reciprocal — that you give some support if you get some support, and you benefit from society if society benefits from you," said Brand, an assistant professor of sociology at UCLA. "When workers are displaced, the tendency is to feel as though the social contract has been violated, and we found that they are less likely to reciprocate." ...
For workers who were displaced during their peak earning years — between 35 and 53 years of age — the effects were the strongest. ...
Affiliation with political groups ... showed no statistically significant downturn over time, possibly because the experience of being displaced impressed some workers with the need for political action. ...
The latest findings have considerable ramifications, she contended. "Whether citizens participate is important for the effective functioning of neighborhoods, schools, communities and democracies," Brand said.
Moreover, withdrawing could prolong unemployment by limiting a displaced worker's exposure to contacts that could possibly lead to a new job.
"If workers withdraw socially after being laid off, then they're experiencing double-jeopardy," Brand said. "They're losing their jobs, and then they're not participating in society, so they're not keeping up with social contacts that might help them find a new job." ... "Everybody loses when people withdraw from society," Brand said.
links for 2008-09-01
- Micro-econometric evidence on US current account sustainability - Vox EU
- Inequality and the Credit Crisis - Interfluidity
- Renewing America's 'contract with the middle class' - Los Angeles Times
- Ben Stein Watch - Felix Salmon
- Does Anyone Believe In The Free Market Any More? - Capital Gains and Games
- Experience? Never Mind - Michael Kinsley - washingtonpost.com
- Palin comparison - Gristmill