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July 27, 2010

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"Conservatism’s Death Gusher"

Posted: 27 Jul 2010 12:42 AM PDT

This from a member of the Linguistics Department at UC Berkeley:

Conservatism's Death Gusher, by George Lakoff, Berkeley Blog: The issue is death — death gushing at ten thousand pounds per square inch from a mile below the sea, tens of thousands of barrels of death a day. Not just death to eleven human beings. Death to sea birds, sea turtles, dolphins, fish, oyster beds, shrimp, beaches; death to the fishing industry, tourism, jobs; and death to a way of life based on the beauty and bounty of the Gulf.

Many, perhaps a majority, of the Gulf residents affected are conservatives, strong right-wing Republicans, following extremist Governors Bobby Jindal and Haley Barbour. What those conservatives are not saying, and may be incapable of seeing, is that conservatism itself is largely responsible for what happened, and that conservatism is a continuing disaster for conservatives who live along the Gulf. Conservatism is an ideology of death. ...

It was conservative laissez-faire free market ideology... Cost-benefit analysis only looks at monetary costs versus benefits, case by case, not at the risk of massive death of the kind that has been gushing out of the Gulf.  Death, in itself, even at that scale, is not a "cost." Only an outflow of money is a "cost." This is what follows from conservative laissez-faire market ideology, an ideology that continues to sanction death on a Gulf scale. ...

The conservative worldview says man has dominion over nature: nature is there for human monetary profit. Profit is sanctioned over the possibility of massive death and destruction in nature. Conservatives support even more dangerous drilling off the coast of Alaska and are working to repeal the President's moratorium on deep water drilling. Nature be damned; the oil companies have a right to make money, death or no death. ...

A great many self-identified conservatives are actually what I've called "biconceptuals," who have both conservative and progressive worldviews, but on different issues. They actually share a progressive view of nature: they love the beauty and appreciate the bounty of the Gulf, as it was before the Death Gusher. They want to save the environment of the Gulf and the way of life as it was. But shift the issue to the culpability of laissez-faire markets, the absolute right to profit from nature and profit-maximizing corporate practices, and their conservative worldview is activated. They will not be able to see the causal role of conservatism itself in the Death Gusher, and in the conservative ideology of greed and death that has given us the global warming disaster we now face worldwide.

Incidentally, there are bi-conceptual Democrats who share the conservative view of the market. Their views have led to many of President Obama's problems with Democrats in Congress.

Finally, there is what progressive Democrats see as a contradiction: conservative advocates of smaller and weaker government and critics of governmental power trying to pin the Death Gusher Disaster on Obama for not having and using enough government power to prevent or lessen the disaster — even though the government has no capacity to plug oil wells.

The contradiction is logical, from a progressive point of view, but not from a conservative point of view. The highest value in the conservative universe is to preserve, defend, and extend conservatism itself. Anything that helps, or fails to harm, Obama contradicts this highest principle, since Obama's deepest values on the whole fundamentally contradict conservative values. Conservatives, on principle, cannot let a major opportunity to criticize Obama go by. Of course, it also helps conservatives politically.

Those who are not held captive by the conservative worldview should be able to recognize the causal role of conservatism in the Death Gusher in the Gulf. Many progressives do, but keep it to themselves.

Progressives have been much too kind to conservatives on this matter. They have largely accepted the Bad Actor Frame, criticizing BP but not the whole industry and its practices. No one should be drilling miles under the sea, where oil comes out at 10,000 pounds per square inch. No matter how much profit is involved.

Conservatism gushes death — and not only in the Gulf of Mexico.

I think there are two different ways to characterize market fundamentalism, a distinction I tried to get at in Markets are Not Magic. One is the belief that markets have desirable properties when the right conditions are in place (i.e. the conditions that ensure that markets are competitive). I think it would be fair to say that most economists hold the belief that markets function well under the proper conditions (and note that the markets described above clearly do not satisfy these conditions).

The second type of market fundamentalism is the belief that markets perform best when government is involved the least -- the less government the better -- and this includes the belief that market failures will self-correct. Markets will take care of any problems an their own, so government intervention is not required.

Almost all economists recognize that there are some market failures that must be corrected by government intervention, the disagreement is over their prevalence. Some economists see widespread and costly market failures, and that government can intervene effectively to overcome them. Thus, an active, interventionist government is required to ensure that markets are functioning correctly. More libertarian types tend to both see fewer market failures and, more importantly, believe that government is not very effective in intervening to correct problems. It's only very large, very obvious cases where government can help, and those are far and few between. Some never see them at all.

So I would characterize the problem slightly differently. It wasn't market fundamentalism per se, it was the wrong type of market fundamentalism. There was too much of the second type, and not enough of the first. That is, those who believe that markets function poorly when there are substantial deviations from ideal market conditions and that government is needed to correct these problems lost the ideological battle several decades ago to those who believe in the second type of market fundamentalism -- one that minimizes government involvement in the economy. We see this in the gulf, we see this in the financial crash, and we see it in other areas of the economy as both economic and political power has been concentrated in fewer and fewer hands. And there has been little, if any resistance from regulators charged with ensuring that markets are free from the problems that can result from such concentrations.

I want government to intervene as little as possible, but the movement in this direction that began in the 1970s has gone too far. I thought the financial crisis would change this, that public and professional opinion would move back toward a more interventionist posture, and that the problems in the gulf would reinforce the change. But the tide hasn't turned as much as I expected. Perhaps this power is entrenched to a degree where it will be a long and difficult battle to reverse it, and it was too much to expect that things would change dramatically in such a short period of time. But it's still disappointing.

Fed Watch: Rising NAIRU?

Posted: 27 Jul 2010 12:33 AM PDT

Policymakers should be more concerned about the possibility of rising long-term unemployment:

Rising NAIRU?, by Tim Duy: Brad DeLong reads Greg Mankiw and reaches the conclusion that:

Mankiw's broader point is that since we have seen nothing like this before except for the Great Depression, we should be humble and risk averse--and hence have the government stand back and wash its hands of the situation.

Paul Krugman concurs, adding a sense of urgency to the current situation:

Quite. I really don't think people appreciate the huge dangers posed by a weak response to 9 1/2 percent unemployment, and the highest rate of long-term unemployment ever recorded…

...Right now, I'm reading Larry Ball on hysteresis in unemployment (pdf) — the tendency of high unemployment to become permanent. Ball provides compelling evidence that weak policy responses to high unemployment tend to raise the level of structural unemployment, so that inflation tends to rise at much higher unemployment rates than before. And the kind of unemployment we're experiencing now, with many workers jobless for very long periods, is precisely the kind of unemployment likely to leave workers permanently unemployable.

And there are already indications that this is happening. Bill Dickens, one of the people has who worked on downward nominal rigidity, tells me that the Beveridge curve — the relationship between job vacancies and the unemployment rate — already seems to have shifted out dramatically. This has, in the past, been a sign of a major worsening in the NAIRU, the non-accelerating-inflation rate of unemployment.

Mankiw said something eerily familiar recently:

This recession looks very different, and much more troubling, than those in the recent past. I wonder how this dramatic change in the nature of unemployment will alter traditional macroeconomic relationships, such as Okun's Law and the Phillips curve.

Some research suggests that the long-term unemployed put less downward pressure on inflation. If that is indeed the case, then the increase in long-term unemployment may mean that we will see less deflationary pressure than we might have expected from the high rate of unemployment. In other words, the NAIRU may have risen, perhaps quite substantially. This is mostly conjecture, however. It seems likely we will see more work on this topic in the coming years.

So Mankiw recognizes the problems posed by protracted periods of economic weakness, yet in his criticism appears to push for more caution while overlooking an obvious reason why the impact of fiscal policy was insufficient to significantly alleviate the recession. It was simply too small - as economists predicted at the time. Indeed, if he is so worried about the risk of rising NAIRU, he should be pushing for policymakers to pull out all the stops.

Mankiw is not alone in seeing the challenges posed by protracted unemployment. From Federal Reserve Ben Bernanke's Congressional testimony:

Moreover, nearly half of the unemployed have been out of work for longer than six months. Long-term unemployment not only imposes exceptional near-term hardships on workers and their families, it also erodes skills and may have long-lasting effects on workers' employment and earnings prospects.

The difference between Mankiw and Bernanke is that the latter not only recognizes the problem, but could also do something about it. Not that he is inclined to. Of course, he is not alone. Philadelphia Fed President Charles Plosser was quoted today:

"Lowering the interest rates closer to zero could have very disruptive effects on the financial markets," Plosser said. "If we bought Treasury bills we could un-anchor expectations of inflation because the public might begin to think we are going to buy up the public debt."

Plosser repeats the credibility story, arguing that additional action as suggested by Joe Gagnon will trigger an inflationary spiral. Likewise, San Francisco Fed President Janet Yellen expressed an unwillingness to adopt a new inflation target:

Janet Yellen, President Barack Obama's pick to be the Federal Reserve's next vice chairman, said it would be "risky" to adopt a long-run inflation goal of 4 percent, and that supervision and regulation are "the first line of defense" against risks to the financial system.

She made the comments in written responses to questions posed by U.S. Senator Richard Shelby, a Republican from Alabama, following her July 15 hearing before the Senate Banking Committee. Yellen, president of the San Francisco Fed, is awaiting confirmation, along with Obama's other nominees, Sarah Bloom Raskin and Peter Diamond…

...She said that while a higher long-run inflation goal would "give the Fed more maneuvering room in the future," she agrees with Bernanke that such a move "would be a risky policy strategy." Most policy makers regard 2 percent as a level consistent with price stability.

I would think that, despite having to endure a higher inflation target, Yellen would be eager to have more maneuvering room. After all, there is not a lot of working room for conventional policy in a liquidity trap. Yet Fed officials seem to prefer the idea that unemployment becomes a long term challenge rather than a short run cyclical issue over the risk of inflation. Like fiscal policy, monetary policy is now limited by imaginary obstacles.

It is worth noting that the long term challenge may already be upon us. David Altig puzzles over the implications of a shifting Beveridge curve, suggesting that extended unemployment benefits may have a role. He then hones in on the possibility of a skills mismatch:

Now I realize that a few anecdotes don't make facts, but I have been in more than a few conversations with businesspeople who have claimed that the productivity gains realized in the United States throughout the recession and early recovery reflect upgrades in business processes—bundled with a necessary upgrade in the skill set of the workers who will implement those processes. This dynamic suggests that the shift in required skills has been concentrated within individual industries and businesses, not across sectors or geographic areas that would be captured by our most straightforward measures of structural change.

To be honest, I hear this complaint too, but have trouble swallowing it. I believed it in the mid and late 1990's, but now? The eight million people dropped into unemployment are all unemployable? Firms are willing to lose profits than do the unthinkable, on the job training, actually invest in their employees? I also have heard the opposite story, of overeducated temporary Census workers desperate for employment, completing assignments in a fraction of the expected time, not realizing that their productivity would only be rewarded with a shorter stint of employment. And if we are experiencing all these magical productivity gains and a shortfall of workers, then wages should be rising quite smartly. But from one of the articles cited by Altig:

Here in this suburb of Cleveland, supervisors at Ben Venue Laboratories, a contract drug maker for pharmaceutical companies, have reviewed 3,600 job applications this year and found only 47 people to hire at $13 to $15 an hour, or about $31,000 a year.

You get what you pay for. To put this into perspective, the average national wage for Wal-Mart was $11.24/hour in 2009. I would hope, however, that Ben Venue Laboratories pays better benefits.

I would really appreciate a good story that explained why we should be happy about high productivity growth if real wage growth is not surging. The lack of the latter makes me question the reality of the former.

Putting my skepticism aside, if a skills mismatch is really a problem, then the solution is to ramp up activity until labor shortages raise wages and force employers to reach deeper into the barrel and in turn bring more people into the labor force to gain those missing skills. Better to do it sooner than later. If the productivity gains are real, the wage gains should not be inflationary. This was the story of the 1990s. Otherwise, policymakers sit and wait as the potential structural rigidities deepen, thereby ensuring a higher NAIRU in the future. And, driven by fear of inflation, this appears to be exactly what policymakers intend to do.

links for 2010-07-26

Posted: 26 Jul 2010 11:03 PM PDT

The Cost of Convenient Optimism

Posted: 26 Jul 2010 02:07 PM PDT

Some thoughts on why the administration did not fight very hard for more stimulus, and the cost of that decision:

The Cost of Convenient Optimism

I'm disappointed to see the administration, and more importantly the economy, in a position that could have been avoided.

Is America Facing an Increase in Structural Unemployment, and If So, What Should be Done About It?

Posted: 26 Jul 2010 09:00 AM PDT

The Economist asks:

Is America facing an increase in structural unemployment, and if so, what should be done about it?

My response is here (I talked mainly about the second half of the question). There are also responses from Daron Acemoglu, Scott Sumner, Richard Koo, Paul Seabright, Gilles Saint-Paul, and David Laibson, with more to come. [All Responses]

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