Grasping Reality with Both Hands: The Semi-Daily Journal Economist Brad DeLong

Oil in the Future

The Future of the Oil Business:

Bloomberg.com: Peak Oil Forecasters Win Converts on Wall Street to $200 Crude
By Deepak Gopinath: Proponents of this controversial idea say global oil production is now at or near its zenith. Once the flow crests and starts to decline -- and some geologists say it already has -- oil will no longer be able to slake the world's growing thirst for energy. The result will be the oil shock to end all oil shocks. The price of a barrel of crude will spiral to $200 -- and keep rising....

Everyone agrees we'll run out of crude eventually. Oil, after all, is a finite resource: The Earth holds only so much of it. The controversial issue is when a global peak will occur -- and what will happen then.... Exxon Mobil, which has reaped record profits as the price of oil has surged, has taken out ads dismissing peak oil in U.S. newspapers such as the New York Times. The Irving, Texas-based oil giant says the peaksters are being alarmist. In all, the world probably has 4 trillion barrels of oil left, four times the amount we have used so far, the ad says....

Predictions of an imminent oil famine are as old as the industry itself....

In the past, Campbell or his disciples have forecast the oil peak down to the year or even the day only to push back the fateful moment. In 1997, Campbell said it would occur in 2001. Now, he says total production, which includes oil from deep-water wells and fuel derived from natural gases, will reach its height sometime after 2010....

Like many oil-industry vets, Cranberg, 51, says market forces and technological advances will ultimately cure our energy ills. As oil prices rise, companies will be more willing to hunt for crude and extract it. They'll invest in expensive deep-water wells and new technologies to wring more oil from existing fields. Consumers will start conserving energy. Even now, stock market investors and Silicon Valley venture capitalists are pouring billions of dollars into companies developing ethanol, solar power and other alternative sources of energy....

High oil prices are only part of the story, however. The world is straining to feed its energy habit. Today, we consume 85 million barrels of oil a day, according to the U.S. Energy Information Administration (EIA). By 2030, the world will devour 118 million barrels a day, as China and India emerge as economic superpowers....

Coming Crunch: The world is not running out of oil -- at least not yet,'' Campbell and Laherrere wrote.What our society does face, and soon, is the end of the abundant and cheap oil on which all industrial nations depend.''...

Some investors and analysts see lots of opportunities in a post-peak world.... The oil sands hold vast stores of bitumen, a tarlike substance that is mined, rather than pumped, and then processed into oil that can be refined. The process is expensive -- and getting more so. Rising operating and capital costs have driven the price of mining and upgrading bitumen to as much as $40 a barrel, Camarta says. By 2020, Canada's oil sands will yield 4 million barrels a day, almost four times what they do now, according to CAPP. That sounds like a lot until you realize that 4 million barrels is just over a third of what Saudi Arabia produced per day in 2005....

It was just 84 years after Revere took his ride, on Aug. 27, 1859, that Edwin Drake struck oil in Titusville, ushering in the Oil Age. Exxon Mobil says the era of oil isn't about to end. In one of its ads, the company says, ``Oil is a finite resource, but because it is so incredibly large, a peak will not occur this year, next year or for decades to come''...

Enough Is Enough! (Why Oh Why Can't We Have a Better Press Corps?)

Could everybody please tell the Washington Post that they need to fire Peter Baker and Jim Vandehei today?

They badly need to do so--if, that is, they ever want to recover their reputation as "objective news reporters."

This is just too stupid to let pass:

Bush Team Casts Foes as Defeatist: While no Democrat has the powerful platform that the White House affords Bush and Cheney, the complaints about the mischaracterizing of positions on the war flow in both directions. Many Democrats accuse the president of advocating "stay the course" in Iraq, but the White House rejects the phrase...

Greg Sargent writes:

The Horse's Mouth: WASHINGTON POST LETS WHITE HOUSE DISTANCE ITSELF FROM "STAY THE COURSE" RHETORIC. This borders on the surreal. From today's WaPo.... Democrats accuse the President of advocating "stay the course" in Iraq? The President's constant assertion that we should "stay the course" in Iraq is a matter of objective fact, not of partisan accusation. And why no fact-check of the White House's "rejection" of the phrase? The White House doesn't reject the phrase. At all. Indeed, the last time President Bush advocated staying the course in just those words was...yesterday:

August 30, 2006: "We will stay the course, we will help this young Iraqi democracy succeed and victory in Iraq will be a major ideological triumph in the struggle of the 21st century."

This shouldn't need pointing out, but "stay the course" has of course been a Bush stock phrase for years now.

August 5, 2005: We will stay the course. We will complete the job in Iraq. And the job is this, we'll help the Iraqis develop a democracy.

April 13, 2004: And my message today to those in Iraq is: We'll stay the course; we'll complete the job. My message to our troops is: We will stay the course and complete the job and you'll have what you need.

July 10, 2003: A free Iraq will mean a peaceful world. And it's very important for us to stay the course, and we will stay the course.

In fairness, there's some good stuff in the WaPo piece, too, but this is just sloppy. With the White House about to unleash another major "public relations offensive" on Iraq, reporters are about to get hit with another relentless fusillade of official lying, and much of it will be of the "we-aren't-advocating-stay-the-course" variety. How will the press handle it? At a moment when Dems are aggressively challenging the GOP over Iraq, it's understandable that White House officials would be desperate to avoid accountability for their own past statements and actions, but that doesn't mean the big news orgs should help them do it.

Relatedly, Atrios notes that Ken Mehlman has been "berating" media figures for holding the administration accountable for its own words. It looks as if WaPo has gotten Mehlman's memo.

I don't care whether it is simple incompetence--an inability to Google the White House website for "stay the course"--or cynical mendacity in the interest of gaining White House brownie points. Ten years. I give the Post ten years.

Econ 101b: Fall 2006: August 31 Lecture Notes: Growth Theory

More introduction to growth theory lecture notes--what I'm going to be working from during the lecture on August 31.

My Work Here Is Done...

The sixteen-year-old is procrastinating on his eleventh grade homework. He is doing so by reading Scott Sagan's "How to Keep the Bomb from Iran," in the September/October issue ofForeign Affairs.

In this aspect of parenting, at least, my work here is done.

Hoisted from Comments: Understanding Danny Okrent: I Don't Think We Can Blame Donald Luskin for This

At http://delong.typepad.com/sdj/2006/08/mix_and_match.html#comment-21732824, Jim Dandy writes, apropos of Danny Okrent's belief that Paul Krugman sought to deceive his readers by mixing-and-matching numbers from the household and the establishment survey:

[DeLong writes:] "None of Okrent's sources--whoever they were--egging him on and telling him that..."

How cute! We certainly know who "they" were [Donald Luskin], but that flying attack monkey shall remain unnamed, having already been confined to "stupidest man" territory.

My guess is that that is probably not the case. We know that Okrent thinks Luskin is creepy. If A thinks B is a creep, A would have to be really stupid, a COMPLETE idiot, totally unfit for paid employment, to take B's word for technical details without verifying them. So I think the balance of the probabilities is that Okrent's source for this was not Luskin.

Hoisted from Comments: KHarris on Economic Journamalism Today

At http://delong.typepad.com/sdj/2006/08/mix_and_match.html#comment-21732472, KHarris writes:

Now hold on. Gene Epstein is not a right-winger. He has no desire to serve the interests of either side of a partisan debate. Wanna know how I know that? I heard him say it on NPR. I believe it was their afternoon PRI (?) business show.

The guy has a book that accuses well regarded economists of making stupid mistakes. He gets air time on the same radio show that routinely lets the WSJ OpEd page's new tax liar, whatsisname Moore?, have air time.

Odd thing is, the same show does some of the least business-friendly business reporting in the mainstream press. I can't figure out what their editorial policy is, but it is mighty clear they have decided not to bother with high-quality views from the right.

Hah! If Gene Epstein did not want to serve Republican interests, why does he blame Krugman and not the Bush Administration, which does the same standard "warranted payroll employment growth" calculation that Krugman does?

The situation is awful. Let me explain:

Since 1981, there have been no high-quality views from the right on economic issues supporting Republican positions. For example, Andrew Samwick has a high-quality view from the right on economic issues. He thinks Bush Administration fiscal policy has been a colossal botch:

Vox Baby: First Things First: I don't disagree with Calculated Risk in his assessment of former Senator Kerrey's and Senator Rudman's admonition to form a commission on "Securing Future Fiscal Health." CR writes:

Everyone should agree that the most immediate fiscal problem is the structural General Fund deficit. Excluding future health care costs, the structural deficit is around 4% to 4.5% of GDP. This serious problem has been caused almost exclusively by Bush's policies. And imagine if the economy slows next year, as many people expect, adding a cyclical deficit on top of the huge Bush structural deficit.

So isn't it reasonable to suggest that Mr. Bush and the GOP fix the structural deficit first, before addressing other long-term issues?

Of course. CR is correct in his diagnosis of the immediacy and the size of the problems of the General Fund deficit. As I have discussed in earlier posts (here and here, for example), the appropriate target for the General Fund deficit is for it to average to zero over a business cycle. A corollary to that is that the General Fund should be in surplus during the non-recessionary parts of that business cycle. (A slightly weaker target that I would also accept is that the Debt/GDP ratio not trend upward over time.) This Administration seems to have no problem submitting budgets that don't conform to this target. Certainly the Congress doesn't aspire to a higher standard.

So as much as I would like to see the looming financial crises with entitlement programs averted, CR's requirement of the current leadership in the White House and the Capitol is a reasonable one to impose as a precondition for agreeing to a bipartisan effort to address what will be the most immediate budget issues in a decade or two. It is also a good test of whether there is any reason at all to return them to those positions after the November elections this year and in 2008.

The media think that they have a problem. The media know that if they put on a balanced program of high-quality views from the left and the right, everyone will have nothing but contempt and scorn for the positions of the Republican politicians. They will then get yelled at from the right--and that, they think, is a problem.

In order to avoid being yelled at from the right, the media think that they have to be unbalanced--to match a high-quality view from the left with a low-quality view from the right. Sometimes the low-quality view from the right comes from a high-quality person who is temporarily putting forth a low-quality view in the hope of someday getting into a position where they can do some good for the world. Sometimes the low-quality view is put forward by somebody incompetent and unqualified.

Dean Baker Is Scared...

Dean Baker writes:

Beat the Press: Not Your Father's Recession: Virtually all economists missed the 2001 recession, in most cases not even predicting it until it was almost over. The main reason was that the recession did not follow the usual pattern. It was the result of the stock market crash decimating tech investment. All prior post-war recessions had been brought on by higher interest rates leading to a falloff in housing construction and new car buying.

There is a similar situation today. If the economy slides into a recession (my bet), it is because of a crash of the housing bubble. This is one that will also not follow the usual pattern. For this reason, standard forecasting methods are likely to provide bad predictions. Fortunately, we have not had many instances of national housing crashes, so we don't have much experience on which to predict the course of a recession based on one. (Yes, housing markets are local, but we will have the simulataneous collapse of enough local markets to have a national impact, just as the rise in housing values had a national impact.)

The one thing we can say is that the recovery from a housing crash induced recession will not be as easy as a normal recovery. You can't just lower interest rates and expect a boom in home construction and car buying. As I've note before, the Fed used the housing bubble to boost the economy out of the recession that resulted from the collapse of stock bubble. It's not clear that it has another potential bubble out there.

Yep. Ben Bernanke is in the hot seat. We wish him luck.

"Mix and Match"

Gene Epstein of Barrons writes, asking:

I wish Brad DeLong would just open my book [Econospinning] "at random" to the 12 pages that make up the second chapter (called "Two Ways to Measure Employment").

The chapter recounts a garden-variety case of econospinning by New York Times columnist Paul Krugman. My version of the story is that Krugman not only confused one set of employment data with another to make a point about the job outlook in a May 2004 column. A year later, when Krugman was given the chance to correct the error by then-Public Editor Daniel Okrent, he denied he had made it. DeLong also weighed in, ostensiby to defend Krugman, but only succeeded in compounding the confusion.

OK.

There is a certain horrifying fascination in watching the right wing's minions and useful idiots in the press attempt to attack Paul Krugman on matters of economic substance. The Mickey Kauses, the Andrew Sullivans, the Donald Luskins, the Danny Okrents--all seem unarmed men in a battle of wits, or perhaps an air assault by a circular firing squad of flying attack monkeys.

Our story so far:

Danny Okrent wrote, conclusively demonstrating to even his closest friends that he was grossly unfit to be New York Times ombudsman:

13 Things I Meant to Write About but Never Did - New York Times: Op-Ed columnist Paul Krugman has the disturbing habit of shaping, slicing and selectively citing numbers in a fashion that pleases his acolytes but leaves him open to substantive assaults.... [S]ome of Krugman's enemies are every bit as ideological (and consequently unfair) as he is. But that doesn't mean that their boss, publisher Arthur O. Sulzberger Jr., shouldn't hold his columnists to higher standards. I didn't give Krugman... the chance to respond.... I decided to impersonate an opinion columnist...

Paul Krugman responded:

Paul Krugman I: In Daniel Okrent's parting shot as public editor of The New York Times, he levied a harsh charge against me: he said that I have "a disturbing habit of shaping, slicing and selectively citing numbers in a fashion that pleases his acolytes but leaves him open to substantive assaults." He offered no examples...

And in reply Danny Okrent did come up with an example--but his example was wrong:

Paul Krugman II: When I asked Daniel Okrent for the specifics behind his final attack, he offered two examples of what he claimed was improper use of numbers. This was the first time I heard from him, or anyone else, about either alleged problem. Let me start with the example that, I think, sheds most light on what is going on: Mr. Okrent's claim that I engaged in "blending, without explanation, numbers from the household survey and the establishment survey -- apples and oranges -- apparently in order to make a more vivid political point about Bush (5/25/04)."

He's referring to two different surveys conducted by the Bureau of Labor Statistics, which provide alternative estimates of employment. Some people play games by mixing and matching numbers from the two surveys, and Mr. Okrent has apparently spent the past year firmly believing (without having checked with me) that I did the same thing, to score political points. But I didn't. All the numbers in my 5/25/04 column came from the establishment survey....

In correspondence with Mr. Okrent, I pointed out that his specific attacks -- especially the blatantly wrong characterization of my 5/25/04 column -- were unfair. I asked him to do what he would have expected me to do, and admit that he had been in error. He refused. Let me repeat that Mr. Okrent never raised these issues as public editor. He now says that he didn't because he "experienced your best-defense-is-a-good-offense approach, and found it futile to deal with it"...

Then Danny Okrent committed virtual self-immolation:

For a man who makes his living offering strong opinions, Paul Krugman seems peculiarly reluctant to grant the same privilege to others.... Because only a fool or a supply-sider would eagerly engage in a debate on economics with Prof. Krugman, I'll try to eschew argument and stick to facts.... The mixing of household and establishment numbers in his 5/25/04 column: Missing from the BLS chart he cites is any number that even resembles the 140,000 new jobs each month needed to keep up with the growing population a statistic he cites in the column, and upon which he seems to have based some of his computations. To my knowledge, that number only appeared in the household survey.

None of Okren't sources--whoever they were--egging him on and telling him that Krugman "mixed-and-matched" numbers had, you see, told Okrent that the 140,000-a-month number came neither from the household survey nor from the establishment survey, but was the result of multiplying current payroll employment by a projected non-elderly adult population growth rate from yet a third source--the census.

This made Paul Krugman just the weeniest, teeniest bit irritated:

[3] Paul Krugman III: Okrent is lying to cover his mistake when he accused me of blending data from the household and establishment surveys. He now claims that he was only referring to my estimate of how many payroll jobs the economy needs to add per month [to keep labor market conditions from deteriorating], which for some reason he thinks is based on the household survey. But that's not what he said to me: he claimed that the basic numbers I gave on job growth were mix-and-match. In fact, in our correspondence, when I said that it was all payroll data, he declared that "your insistence that you relied only on one set of numbers is very puzzling. I don't see how the math works any other way; maybe you could further enlighten me." In other words, [Okrent] screwed up completely...

That's the back story. Now for the new episode, in which Gene Epstein of Barrons arrives at the scene to do what Danny Okrent won't--to defend Okrent's claim of Krugman's "mixing and matching"--and thus to join Okrent in virtual self-immolation:

Epstein: Just re-read the second-to-last paragraph in [Krugman's May 25, 2004] column.

And employment is chasing a moving target: it must rise by about 140,000 a month just to keep up with a growing population. In April, the economy added 288,000 jobs. If you do the math, you discover that President Bush needs about four years of job growth at last month's rate to reach what his own economists consider full employment."

Isn't "140,000" a number? It comes from the Household Survey--more formally known, as I needn't tell you, as the Current Population Survey--which ties in with the reference to the "growing population." As I explain in my book, that 140,000 is clearly based on the plausible, ball-park expectation that the Civilian ( i.e., employment-eligible) Population will be increasing at an average of about 210,000 a month, and that the labor force participation rate will run about two-thirds. Since two-thirds of 210,000 is 140,000, the plausible assumption is that the labor force will grow by 140,000 a month. And what the first sentence of that paragraph is saying is that "employment... must rise by about 140,000 a month to keep up with a growing population" because if it doesn't, there will be unemployment....

The only way to get Krugman's "four years" is to mix the data together--"apples and oranges"--exactly as Daniel Okrent had originally said. As I point out in the book, that does not even make "good nonsense," but you do get Krugman's result!

Is Epstein correct?

No.

As I emailed Epstein:

No [the 140,000 a month number] doesn't [come from the Household Survey]:

The CPS is a survey. Each month, it surveys 18,000 clusters of about four housing units each in 754 sample areas. The CPS produces estimates of things like employment-to-population ratios, unemployment rates, unemployment durations, labor status transition properties. It doesn't produce any information about trend labor force growth. It doesn't produce any information about how fast payroll employment has to expand to keep the labor market at about the same level of tightness. It can't--it is a survey of households, not a count of how fast the number of households and thus the number of potential workers is growing.

IIRC, Paul calculated the 140,000 number by taking Census--not CPS--estimates of the rate of adult population growth and multiplying that growth rate by the current level of payroll employment.

I don't see how the CPS could have entered into it.

You see, the "plausible, ball park expection that... [adult, non-elderly, civilian] population will be increasing at an average of about 210,000 a month comes from census projections, not from the household survey.

And it gets worse.

You see, the Bush Administration in its 2004 Economic Report of the President did the same calculation as Krugman, using the same census and establishment survey sources. You can see it on p. 94:

The Labor Market: Nonfarm payroll employment fell an average of 50,000 workers per month in the first seven months of 2003, before increasing 35,000 in August, 99,000 in September, and an average of 48,000 per month in the fourth quarter.... In the fourth quarter, the unemployment rate averaged 5.9 percent.... Because the labor force is constantly expanding, employment must be growing moderately just to keep the unemployment rate steady. For example, if the labor force is growing at the same rate as the population (about 1 percent per year), employment would have to rise 110,000 a month just to keep the unemployment rate stable, and larger job gains would be necessary (and are expected) to induce a downward trend in the unemployment rate...

The only difference between the Bush Administration and Krugman is that the Bush Administration assumed 1% per year as the rate of adult non-elderly population growth, and hence concluded that nonfarm payroll employment had to grow at 1/12 of a percent per month--110,000, that is--in order to keep labor market conditions stable. But growth is more like 1.25% per year. With payroll employment of 130 million, that's Krugman's number of about 140K per month.

Sigh.

As I said, a certain horrifying fascination.

Why oh why can't we have a better press corps?

Fall 2006 Office Hours

It's fall! Time to switch my office hours back to Evans 601. Tuesday 12-2, or by appointment--send email to delong@econ.berkeley.edu

Econ 101b: Fall 2006: More Notes for August 29 Lecture

Two Resources:

• Gapminder: http://tools.google.com/gapminder/
• Solow growth model scenario spreadsheet: http://delong.typepad.com/print/20060829_Solow_growth.xls

A Cautionary Tale (TO BE FIXED):

• De-development in Zambia, 1975-2004: http://delong.typepad.com/print/20060829_Zambian_dedevelopment.pdf

I Want My Live Embedded Data!

Chris Anderson writes:

The Long Tail: Google Apps and the power of embedded functionality: There been a lot of talk today about Google releasing a suite of hosted applications.... As Anil Dash discusses here, these web-based apps are not meant to replace Office but to compliment it by doing things online that desktop software just can't do well. What might those things be? I think we have a hint in the spread of embedded video, courtesy of YouTube. The ability to easily embed into any blog page a full-featured videoplayer dedicated to a single video is a large part of YouTube's success. It doesn't require you to go elsewhere or download anything--it just works.

Now imagine the same model working for data. Rather than me posting static jpeg charts and links to Excel spreadsheet files, what if I could post data the way I post videos: as an embedded mini-app that simply displays the data in a useful way, allowing readers to manipulate or copy it at will?... That's what I want. Not an online spreadsheet that simply replicates what Excel already does perfectly well on my laptop, but small spreadsheet elements that I can paste... in the form of a specific data set or graph. The fact that they're hosted elsewhere is what would make them simple enough to use, just as embedding YouTube video is so head-slapping easy today....

The embedded functionality era has just begun. YouTube is just the start of something much bigger.

Indeed. I had thought by now that I would be able to simply embed the spreadsheet at http://delong.typepad.com/print/20060829_Solow_growth.xls in my online lecture notes, so that people could easily see and then do their own Solow growth model calculations. But it hasn't happened--although I strongly suspect Google or Microsoft will make it possible by this time next year.

YouTube is not the only example of this working now. Consider gapminder: http://tools.google.com/gapminder/

Econ 101b: Fall 2006: Problem Set 1

PROBLEM SET 1: ECON 101B: FALL 2006

Due at start of lecture on Tuesday September 5

1. Perform the following steps: a. Using your web browser (ideally Firefox), surf to http://www.vox.com/. b. Click on the "Please sign in" link in the upper right corner of the window. c. Sign in with email "xxxx" and password "xxxx". d. Click on the "Organize" link in the upper right corner of the window. e. If needed, click on the "Photos" button on the left. (It probably won't be needed.) f. Click on the "+ New" button. g. By clicking on the "Browse" button in the window that opens, select a photo of yourself to upload. h. By typing in the "tags" box in the window that opens, associate the photo with your name. i. Be sure the permissions on the photo are what you wish. Since everyone in the class has the userid and the password, selecting "you only" for the photo means that it can be seen by me and by the rest of the class. Selecting "world" means it can be seen by the world... j. Look at the photo of the bald man on the "Organize your stuff" page. Guess who the bald man is, and guess what the time series behind him is. k. Email Brad DeLong (at delong@econ.berkeley.edu) and Joe Rosenberg (at jwr_econ@berkeley.edu) telling us your guess, and whether you were able to successful upload and label the photo. l. You now have write access to the course website. I'd appreciate it if you didn't delete anything, but feel free to add interesting things to the website. Tag the additions you make with your name, and with whatever other category tags will help people find them.

2. Explain whether or not, why, and how the following items are included in the calculation of GDP: a. Increases in business inventories. b. Fees earned by real estate agents on selling existing homes. c. Social Security checks written by the government. d. Building of a new dam by the Army Corps of Engineers. e. Interest that your parents pay on the mortgage they have on their house. f. Purchases of foreign-made trucks by American residents

3. Calculating real magnitudes: a. When you calculate real GDP, do you do so by dividing nominal GDP by the price level or by subtracting the price level from nominal GDP? b. When you calculate the real interest rate, do you do so by dividing the nominal interest rate by the price level or by subtracting the inflation rate from the nominal interest rate? c. Are your answers to (a) and (b) the same? Why or why not?

4. Suppose that the appliance store buys a refrigerator from the manufacturer on December 15, 2005 for $600, and that you then buy that refrigerator on January 15, 2006 for $1000: a. What is the contribution to GDP in 2005? b. How is the refrigerator accounted for in the NIPA in 2005? c. What is the contribution to GDP in 2006? d. How is the refrigerator accounted for in the NIPA in 2004?

5. Why do DeLong and Olney think that the interest rate and the level of the stock market are importnant macroeconomic variables?

6. What are the principal flaws in using GDP per worker as a measure of material welfare? Given these flaws, why do we use it anyway?

7. Suppose a quantity grows at a steady proportional rate of 3% per year. How long will it take to double? Quadruple? Grow 1024-fold?

8. Suppose we have a quantity x(t) that varies over time following the equation: dx(t)/dt = -(0.06)x + 0.36. a. Without integrating the equation, tell me what the long-run steady-state value of x--that is, the limit of x as t approaches in infinity--is going to be. b. Suppose that the value of x at time t=0, x(0), equals 12. Once again, without integrating the equation, tell me how long it will take x to close half the distance between its initial value of 12 and its steady-state value. How long will it take to close 3/4 of the distance? 7/8 of the distance? 15/16 of the distance?

9. Now you are allowed to integrate dx(t)/dt = -(0.06)x + 0.36. a. Write down and solve the indefinite integral. b. Write down and solve the definite integral for the initial condition x(0) = 12. c. Write down and solve the definite integral for the initial condition x(0)=6.

10. What is the difference between the nominal interest rate and the real interest rate? Why do DeLong and Olney think that the real interest rate is more important?

Econ 101b: Fall 2006: Handout: August 29 Lecture

Introduction to the Course, and Introduction to the Theory of Economic Growth

A few graphs:

• World income distribution and telephone usage 2005
• World income distribution and telephone usage 1975
• U.S. nonfarm employment, 1940-2006
• U.S. real GDP per worker, 1950-2006

A simple model, the Solow model, for analyzing an economy with labor L, capital K, and technology E...

• The Solow model assumes:
• The labor force grows at a constant proportional rate n
• The rate of improvement of "technology" is a constant proportional rate g
• Savings leads to investment of a fraction s of output Y in increasing the capital stock K
• A constant proportion delta of the capital stock K wears out each period.
• How much of the cross-country and cross-time pattern of economic growth can we explain with this simple model?
• Solow Model Handout

Course website: http://berkeley101bfall2006.vox.com/

Greenhouse and Leonhardt on Real Wages and Productivity

The thoughtful and reliable Steven Greenhouse and David Leonhardt:

Real Wages Fail to Match a Rise in Productivity - New York Times: With the economy beginning to slow, the current expansion has a chance to become the first sustained period of economic growth since World War II that fails to offer a prolonged increase in real wages for most workers.... The median hourly wage for American workers has declined 2 percent since 2003, after factoring in inflation. The drop has been especially notable, economists say, because productivity -- the amount that an average worker produces in an hour and the basic wellspring of a nation's living standards -- has risen steadily over the same period.

As a result, wages and salaries now make up the lowest share of the nation's gross domestic product since the government began recording the data in 1947, while corporate profits have climbed to their highest share since the 1960's.... Until the last year, stagnating wages were somewhat offset by the rising value of benefits, especially health insurance, which caused overall compensation for most Americans to continue increasing. Since last summer, however, the value of workers' benefits has also failed to keep pace with inflation....

"Some people who aren't partisans say, 'Yes, the economy's pretty good, so why are people so agitated and anxious?'" said Frank Luntz, a Republican campaign consultant. "The answer is they don't feel it in their weekly paychecks."...

Economists offer various reasons for the stagnation of wages. Although the economy continues to add jobs, global trade, immigration, layoffs and technology -- as well as the insecurity caused by them -- appear to have eroded workers%u2019 bargaining power. Trade unions are much weaker than they once were, while the buying power of the minimum wage is at a 50-year low. And health care is far more expensive than it was a decade ago, causing companies to spend more on benefits at the expense of wages.

Together, these forces have caused a growing share of the economy to go to companies instead of workers' paychecks. In the first quarter of 2006, wages and salaries represented 45 percent of gross domestic product, down from almost 50 percent in the first quarter of 2001 and a record 53.6 percent in the first quarter of 1970, according to the Commerce Department. Each percentage point now equals about $132 billion.

Total employee compensation -- wages plus benefits -- has fared a little better. Its share was briefly lower than its current level of 56.1 percent in the mid-1990%u2019s and otherwise has not been so low since 1966....

For most of the last century, wages and productivity... have risen together.... But in recent years, the productivity gains have continued while the pay increases have not kept up. Worker productivity rose 16.6 percent from 2000 to 2005, while total compensation for the median worker rose 7.2 percent, according to Labor Department statistics analyzed by the Economic Policy Institute, a liberal research group. Benefits accounted for most of the increase.

"If I had to sum it up," said Jared Bernstein, a senior economist at the institute, "it comes down to bargaining power and the lack of ability of many in the work force to claim their fair share of growth."...

Average family income, adjusted for inflation, has continued to advance at a good clip, a fact Mr. Bush has cited when speaking about the economy. But these gains are a result mainly of increases at the top of the income spectrum that pull up the overall numbers.... In 2004, the top 1 percent of earners... received 11.2 percent of all wage income, up from 8.7 percent a decade earlier and less than 6 percent three decades ago, according to Emmanuel Saez and Thomas Piketty, economists who analyzed the tax data...

If I Have Seen Nothing But Mud, It Is Because...

Max Sawicky driven shrill by the assumption of perfect capital mobility:

MaxSpeak, You Listen!: STANDING ON THE SHOULDERS OF MEN IN DITCHES; VERY DEEP DITCHES: Professor Menzie Chinn at Econobrowser:

I understand why many models assume perfect capital mobility. Imperfect capital mobility is hard to model.

SYLLABUS: ECON 101b: MACROEONOMICS: FALL 2006

SYLLABUS: ECON 101b: MACROEONOMICS: FALL 2006

Brad DeLong delong@econ.berkeley.edu Office Hours: T 12-2 Evans 601, or by appointment http://www.j-bradford-delong.net/

Joe Rosenberg jwr@econ.berkeley.edu Office Hours: F 9-1 TBA

Lecture Meets: TTh 2-3:30, 70 Evans
Sections Meet: MW 9-10 47 Evans, WF 11-12, 51 Evans
Course Website: http://berkeley101bfall2006.vox.com/

This is the syllabus for Economics 101b, Macroeconomics. It carries the course up until November 7. The syllabus for the rest of the course will be distributed later, and will depend on (a) how the class goes in September and October, and (b) what the currently "hot topics" in the economic news happen to be. The possibility of an American or global recession, the U.S. budget deficit, the looming possibility of a major U.S. dollar-financial crisis, the dilemmas of Federal Reserve policy, and the ongoing industrial revolutions in East and South Asia will certainly be on the second-half syllabus, but there will be other topics as well.

This is the go-faster and do-more version of macroeconomics--the study of the determination of output, production, income, employment, and prices in the economy as a whole.

TEXTBOOK

One book is required:

1. The intermediate macroeconomics textbook is the one that Brad DeLong and Marty Olney have written. DeLong and Olney (2005), Macroeconomics 2nd ed. (New York: McGraw-Hill/Irwin) http://www.amazon.com/exec/obidos/asin/0072877588/braddelong00. Here is our explanation of why we wrote it the way we did: http://www.j-bradford-delong.net/Teaching_Folder/manifesto.html

Other things you might want to look at:

1. The Economic Report of the President, available online at http://w3.access.gpo.gov/eop/, for the U.S. government's view of the state of the economy.

2. For recent economic data, the CEA-JEC _Monthly Economic Indicators http://www.access.gpo.gov/congress/eibrowse/broecind.html.

3. Robert Heilbroner's The Worldly Philosophers (New York: Touchstone) http://www.amazon.com/exec/obidos/asin/068486214X/braddelong00.

4. Alan Blinder and Janet Yellen's (2001) The Fabulous Decade (New York: Century Foundation) http://www.amazon.com/exec/obidos/asin/0870784676/braddelong00.

5. Various intelligent and readable weblogs by economists: Greg Mankiw, Tyler Cowen and Alex Tabarrok, Mark Thoma, Jim Hamilton and Menzie Chinn, Brad Setser, Max Sawicky, Dean Baker, the Economic Policy Institute

If you want alternative takes at the subject matter, let me recommend two alternative textbooks: Greg Mankiw's Macroeconomics- http://www.amazon.com/exec/obidos/ASIN/0716762137/braddelong00, and Olivier Blanchard's _Macroeconomics http://www.amazon.com/exec/obidos/ASIN/0131860267/bradelong00. Olivier covers an extraordinary amount of ground at a conceptually (but not mathematically) very sophisticated level. His book is the best introductory macro book for those who can follow it. Greg is a brilliant and thoughtful man who is better than anybody else at making his point of view on economics seem natural and inevitable logical truths. Certainly the clearest introductory macro book.

GO-FASTER, DO MORE

Since this is a go-faster do-more course, we will go faster and do more. As a group, the class will be made up of people comfortable using calculus, so we'll feel free to use it in lectures, handouts, and in problem sets (and on exams). If you aren't comfortable using calculus, you probably don't belong here and may well not have a good time.

We will do a lot of things that are not in the book.

WEB

Since we will do a lot of things that are not in the book, I will need a place to put them. As some of you know, for the past decade I have been thrashing around, trying to figure out how to use modern electronic computer and communications technologies to supercharge education. The thrashing continues. This year's thrash will be to put the course website at:

http://berkeley101bfall2006.vox.com

More about this later...

GRADES

We are keenly aware that almost everybody signing up for this course could alternatively take and do very well in Economics 100b. We are anxious not to have students vote with their feet for an easier course and learn less because they fear the consequences of lowering their grade point average. Therefore this course will have a high curve: the idea is that nobody should get a lower grade than they would have gotten had they decided to take Economics 100b.

Grades will be based on the following:

• 20% from a first Midterm Exam to be given Wednesday September 28. (This is really early to give a midterm. Nevertheless it is important to give a midterm exam early in the course to serve as a reality check: so that students in trouble can figure out how much trouble they are in, and also--more important--so that at least one of us (DeLong) can figure out how unrealistic and detached from reality his beliefs about his teaching effectiveness are.)
• 20% from a second Midterm Exam to be given October 19.
• 20% from a (short: two hours long) Final Exam to be given December 13.
• 20% from Problem Sets. Problem Sets will be graded either 0 points (didn't hand it in on time), 1 point (handed it in but didn't make much of a successful effort) to complete it, and 2 points (made an effort--largely successful--to solve the problems).
• 10% from a five-page paper due
• 10% from section participation.

No makeup exams will be offered. Students who miss one of the three exams will have their scores for the other exams reweighted to add up to 60%. Students who miss two of the three exams should not expect to pass the course.

Since this is a go-faster and do-more course,

T Aug 29: INTRODUCTION: The Problems of Macroeconomics [Background reading: Macroeconomics, chs. 1-3]

Th Aug 31: THE LONG RUN: ECONOMIC GROWTH: Model-Building [Reading: Macroeconomics, ch. 4]

T Sep 5: THE LONG RUN: ECONOMIC GROWTH: Model-Building: Capital and Equilibrim

Th Sep 7: THE LONG RUN: ECONOMIC GROWTH: Model-Building: Dynamics and Feedback

T Sep 12: THE LONG RUN: ECONOMIC GROWTH: Application: How Much of the World Can We Explain? [Reading: Macroeconomics, ch. 5]

Th Sep 14: THE LONG RUN: ECONOMIC GROWTH: Model-Building: Technology and Organization

T Sep 19: THE LONG RUN: ECONOMIC GROWTH: Application: Technology, Organization, and Political Economy

Th Sep 21: FIRST MIDTERM EXAM ("Professorial Reality Check" Exam)

T Sep 26: THE MEDIUM RUN: Introduction: Full Employment, Flexible Prices, and Accurate Expectations [Reading: Macroeconomics, ch. 6]

Th Sep 28: THE MEDIUM RUN: The Real Side: Model-Building: Components of Aggregate Demand

T Oct 3: THE MEDIUM RUN: Model-Building: Full-Employment Equilibrium [Reading: Macroeconomics, ch. 7]

Th Oct 5: THE MEDIUM RUN: The Real Side: Application: Government Surpluses, Government Deficits, Investment Booms

T Oct 10: THE MEDIUM RUN: The Real Side: Application: The International Side: Exchange Rates, Net Exports, and Sectoral Shifts

Th Oct 12: THE MEDIUM RUN: The Monetary Side: The Quantity Theory of Money [Reading: Macroeconomics, ch. 8]

T Oct 17: THE MEDIUM RUN: The Monetary Side: Inflation and Expectations

Th Oct 19: SECOND MIDTERM EXAM ("Medium Run" Exam)

T Oct 24: THE SHORT RUN: Business Cycles: Model-Building: Sticky Prices and Aggregate Demand [Reading: Macroeconomics, ch. 9]

Th Oct 26: THE SHORT RUN: Business Cycles: Model-Building: The IS Curve and Employment [Reading: Macroeconomics, ch. 10]

T Oct 31: THE SHORT RUN: Business Cycles: ApplIcation: Stabilization Policy since WWII

Th Nov 2: THE SHORT RUN: Business Cycles: Model-Building: The Phillips Curve and Inflation [Reading: Macroeconomics, ch. 12]

T Nov 7: CONCLUSION: Business Cycles: Model-Building: Tying Up the Short-Run and the Medium Run

Th Nov 9:

T Nov 14:

Th Nov 16:

T Nov 21: NO CLASS

T Nov 28:

Th Nov 30:

T Dec 5:

Th Dec 7: FINAL REVIEW

W Dec 13: FINAL EXAM 12:30-3:30

Republicans Eat Their Young!

Orders have just come down from Kos to post this. I have no choice:

Daily Kos: RI-Sen: NRSC goes racist: Scaaaaary brown people are invading Rhode Island. I wonder what "moderate" Lincoln Chafee thinks about this NRSC fear-mongering. Apparently, it's bad that Laffey, a real wingnut mind you, didn't put Mexicans in concentration camps as mayor of Cranston. As an aside, that's the Republican Party running ads against Republican Steve Laffey...

Nobody who is an immigrant or the descendant of immigrants has any business voting Republican. Nobody.

---

Kos follows up:

Daily Kos: RI-Sen: NRSC puts everything into rescuing Chafee: Not only is the cash-strapped NRSC spending millions running racist ads against fellow Republican Stephen Laffey in an effort to rescue the flailing incumbent Lincoln Chafee (R), but they are sending all the bodies they can as well:

Democrats were right in 2004: the Republicans have adopted a draft. It only applies, however, to party workers employed by state victory committees in the east of the Mississippi. For many it will be worse than boot camp. They are to be sent to Rhode Island to try to rescue Republican Sen. Lincoln Chafee's re-election campaign in the September 12th primary.

Workers start arriving Friday and will be charged with sorting out the mess that Washington operatives believe is the Chafee campaign. First task may be to get Republican voters to forget Chafee's erratic performance in the last two of the four broadcast debates between the incumbent and his lively challenger, Cranston mayor Stephen Laffey.

Scores of GOP workers will begin arriving this week and stay through the open primary as they search for and then try to persuade some of the 70,000 registered Republicans and several hundred thousand independent voters eligible to participate in the open primary to support Chaffee. Draftees, many of whom may be more compatible with Laffey, will be paid by their home-state committees. Food and lodging expenses will be picked up by Republican National Committee.

Keep in mind what this means: assuming this report by the Hotline is accurate, the NRSC is pulling valuable workers in important battleground states like Missouri, Ohio, Tennessee, Virginia, New Jersey, and Pennsylvania for a full two weeks.

They are weakening their effort on behalf of weak candidates to rescue one of their incumbents from a primary battle. As the Hotline blog notes, some of those NRSC's staffers won't be happy to go and work for Chafee and against Laffey. It would've been like the DSCC forcing staffers to abandon their posts in hot contested races to go work for Lieberman and against Lamont.

Redstate's Mike Krempasky is already seeing red (pardon the pun) over the NRSC's anti-Laffey spending.

This is what your money is being spent on - attack ads on behalf of Lincoln Chafee. Give me a break. We're fighting on enough fronts to keep the Senate - and this is what Liddy Dole sees as a priority. No wonder their fundraising is in the tank. If Republicans want to make a real statement about their committment to winning elections, they ought to yank her BEFORE election day. Period.

Krempasky wrote that before the NRSC redirected half of their national staff to Rhode Island. I'm sure he'll be particularly pleased at that bit of news.

The State of Working America 2006-07

Probably the most useful single volume about the state of the American economy you can have on your bookshelf:

New From EPI -- The State of Working America 2006-07: On Labor Day 2006, the Economic Policy Institute releases its advance edition of The State of Working America 2006/2007. Prepared biennially since 1988, EPI's flagship publication sums up the problems and challenges facing American working families, presenting a wide variety of data on family incomes, taxes, wages, unemployment, wealth, and poverty — data that enables the book's authors to closely examine the impact of the economy on the living standards of the American people. The State of Working America 2006/2007 is an exhaustive reference work that will be welcomed by anyone eager for a comprehensive portrait of the economic well-being of the nation.

http://www.stateofworkingamerica.org/

Why Oh Why Can't We Have a Better Press Corps? (Washington Post Edition)

Dean Baker watches the Washington Post further shred its reputation:

Beat the Press: Okay folks, get your checkbooks out. The people who pledged a CEPR contribution for every Post article/column whining about entitlements owe us money. This one is from Bob Kerrey and Warren Rudman, the co-chairs of the Concord Coalition.

In addition to conflating Social Security and Medicare... the column also has a few other standard scare tactics.... [I]t projects a rise in spending from approximately 20 percent of GDP at present to 40 percent in 30 years. The biggest part of this rise is due to a rising interest burden. See, if we run larger deficits, and Congress never responds by either raising taxes and/or cutting spending, then we get a rising interest burden. Silly trick, but this is the Post.

And of course, the article never discusses health care reform as something that should be on the national agenda....

The fact that the Post prints this stuff would not be so bad if they would occasionally allow an opposing view.

Fire Fred Hiatt. Fire Fred Hiatt today.

Prices at the Pump

Hal Varian on why gas prices react so fast to rises in oil prices:

The Rapidly Changing Signs at the Gas Station Show Markets at Work - New York TimesTHE recent gyrations in oil prices offer a textbook illustration of how financial markets and commodity markets interact. Oil prices are notoriously volatile, particularly when times are tense in oil-producing countries -- just about all the time these days. So when BP announced this month that it might have to suspend as much as 8 percent of the nation's oil production because of corrosion in pipes on the North Slope of Alaska, the price of crude oil immediately shot up by 3 percent and wholesale gasoline prices simultaneously increased by about 2 percent.

But why? Even if it will cost more to produce gasoline in the future, gasoline being sold today was made with cheaper oil. This must be a rip-off, right? Actually, no. The reason behind the quick price change is a phenomenon known as storage arbitrage.

To spell out the argument, imagine that you own a storage tank full of gasoline that is currently worth $2 a gallon at wholesale prices. It is widely believed, however, that the price of gasoline will be $2.10 next week. You would be crazy to sell your gasoline now: just wait a few days and the higher price will be yours. But if everyone waits a few days, there is no gasoline to be sold now and the resulting shortage pushes the price of gasoline up. How high does it have to go? The answer is $2.10 a gallon. That is the price necessary to induce those who have gasoline to sell it now rather than to wait till next week.

This argument does not depend on whether you think the gasoline market is a paragon of perfect competition or an evil oligopoly. All it requires is that you believe that people who own gasoline, like just about everybody with something to sell, prefer to receive a higher price rather than a lower price. Even if the price of gasoline were set by a perfectly benevolent conservationist, we would expect to see the same pattern of price movements. If oil will be scarcer in the future because of the BP pipeline shutdown, we would want to conserve the already-produced gasoline that we have now. That means that the price of gasoline has to rise right away to prevent hoarding and to encourage conservation.

Storage arbitrage arguments were featured in a recent article in the Sunday Business section of The New York Times with the headline "Is a Futures Stampede Keeping Oil Prices High?%" The article described a provocative report written by Ben P. Dell, an analyst at Sanford C. Bernstein & Company, that blamed speculation in oil futures markets for high oil prices. Mr. Dell's argument was that inexperienced institutional investors had been investing in contracts for future delivery of oil, driving up futures prices. If the price of oil to be delivered in the future goes up, it has to pull the current spot price up as well....

Milton Friedman argued that speculation normally helps to stabilize prices rather than destabilize them.... If speculative trading tends to push prices higher when they are already high and lower when they are already low, then traders must be buying high and selling low. That would mean that traders have to lose money on average.... To the contrary, speculative traders try to buy low and sell high, activities that by their nature tend to push prices up when they are too low and down when they are too high.... If speculators start to worry that the price of oil could soon be significantly lower, some of that stored oil would come back on the market, pushing spot prices down, and offering welcome relief to consumers.

IIRC, there are some signs of a rocket-feather asymmetry: that gasoline prices rise quickly when oil prices rise, and fall more slowly when oil prices decline...

Hoisted from Comments: James Galbraith on "Dean Baker on Judges Behaving Badly"

James Galbraith weighs in:

Brad DeLong's Semi-Daily Journal: Dean Baker on Judges Behaving Badly: I keep harping on a theme, but I can't help it.

The one thing missing from this discussion, at every level from Brad DeLong and Paul Krugman through the comments, is actual data.

D-A-T-A. Numbers. Measurement.

Everyone is talking about inequality, attributing 2/5ths to this cause and the rest to some other.

But what are you talking about, actually?

Income inequality? Earnings inequality? Wage inequality? They are not the same, and in the U.S. they sometimes don't even move in the same direction.

Income inequality soared in the late 1990s. Why? A decomposition by region and sector can tell you pretty much exactly: it was the tech bubble and the stock boom. Capital gains and stock options realizations. Much of it in just five places in the whole country: Manhattan, King County WA, and Santa Clara, San Francisco and San Mateo Counties, CA. Take out those five, as Travis Hale and I showed in a paper, and the between-counties component of income inequality (which isn't all of it, but it isn't chopped liver, either) doesn't go up at all.

Meanwhile, earnings inequality went down in the same time. Why? Full employment. This component of inequality is closely tied to utilization rates and unemployment. It varies with hours worked, and overtime earned, more than anything else. It is, in short, a macroeconomic phenomenon.

Most of the discussion here and elsewhere, sadly, is about a third concept -- inequality in hourly wage rates. That is the subject of Dean Baker's anecdote about Northwest airlines: the flight attendants do not wish to work for the wage rate the company is offering.

In a decade of working on this topic, I have yet to see any measure of inequality that is based exclusively on movements in relative hourly wage rates. Not one. No doubt, changes in the structure of hourly rates can affect inequality, in principle -- changes in the minimum wage do have a measurable effect in past data.

It is quite certain, however, that the effect of changes in relative hourly wage rates on income inequality is very, very small, compared to that of changes in non-wage income (such as capital gains), and changes in the macro and demand factors that cause variations in relative earnings.

Understanding the hierarchy of components of income is the first, small step toward a realistic grip on the inequality issue. Any takers?

James Galbraith

I would say there are five things going on: (a) income and wealth at the top end, driven by changes in finance; (b) the effects of unemployment on the wage share; (c) skill-biased technological change; (d) declining union power; and (e) shifts in policy that erode equality-supporting measures like the minimum wage. I can't untangle them.

Genocide in Darfur

Genocide continues:

Eric Umansky: Never Say Never Again: Darfur's nightmare was always bound to end in some way. It could end in a peace agreement... or through the intervention of a strong peacekeeping force.... Or it could end with the civilian population of Darfur being mostly wiped out, either killed or starved or driven into permanent exile. The United States gave the first possibility its best shot last year, and failed; it is now calling, more than a little ineffectually, for the second. But the third is more likely at this point....

How can one government, ruling a weak and deeply divided country, wield such authority? Because it is not isolated.... China has evidently placed its UN Security Council veto at Khartoum's disposal... but China would not so exert itself about a conflict in Africa.... The fact is that Sudan, a member of the Arab League, has the unquestioning support of the [Arab] League and of every Arab government for anything it chooses to do in Darfur. The same governments and Arab media that wail piteously about the suffering of Arabs at the hands of Westerners and Israelis are fine with genocide sponsored by an Arab government.

That is the root of the matter; that is why Khartoum is able to call on China.... The government responsible for genocide knows, as Beijing does as well, that in standing up for murdering large numbers of Africans it will be seen in Arab countries as standing up for Arab dignity. Arab voices outside of government seem to know it too.... The whole situation has grim implications for the Mideast democratization strategy so beloved of President Bush -- how does it help us or anyone else if people tolerant of genocide get to vote in free elections?

That aside, though, now would be a good time to decide if we mean to let Sudan complete its final solution to the Darfur problem without doing anything at all. The least that ought to be done is to push the Anglo-American resolution calling for a UN peacekeeping force in Darfur to a vote in the Security Council. If China and the Arab governments are going to come out in support of mass murder and gang rape as weapons of warfare they might as well be forced to do so in the plain light of day.

After the Rwandan genocide of 1994 any number of people in Europe and America promised each other "never again." Well, "again" has happened at least three times since; a government-imposed famine in North Korea in the late 1990s and the maelstrom that has enveloped Congo for the last several years were the first two. Darfur is the third.... [S]o little effort has been made to isolate a government recklessly pursuing a vicious policy....

Perhaps a more forceful Western effort in the Security Council will accomplish no more than putting genocide's enablers on record. That's not much, but it's not nothing, and we'll never know if more is possible if the effort is not made.

JEB

Bradford Plumer Talks Sense About Welfare Reform

He writes:

Bradford Plumer: Was Welfare Reform a Fraud? While I was moving, the tenth anniversary of welfare reform came and went without too much fanfare. Many observers simply declared that welfare reform had "worked," because caseloads had declined. But what kind of metric is that? The whole point of reform was to push people off welfare. Of course caseloads were going to decline%--that's what the law did. We should be asking if families are now better off because of it.

I'm sure you can guess my answer but I'll go through the numbers anyway.

Nation-wide, welfare caseloads declined from 4.4 million families in 1996 to about 2 million families today, as states began kicking people off the rolls. So what happened to all of those families? The Urban Institute conducted a massive survey on this, and found that in 2002, of those who left welfare:

• 57 percent were working (about 40 percent full-time)
• 26 percent had returned to welfare
• 14 percent had "no employment income, no working spouse, and no cash welfare or public disability benefits." (Presumably some of these families receive other benefits from America's stingy safety net, such as housing assistance, food stamps, or WIC grants.)

Welfare "reform" has obviously failed the last group, people who by and large are in poor physical and mental health and unable to work. That's about 300,000 families so far, and the number has grown since 2000. Many more families who still receive assistance will likely face a similar situation once they run up against the five-year time limit and get kicked off welfare. That's especially true if Republicans in Congress get their way and pass rules that would make it harder for states to evade these time limits.

Now consider the first group, those who went back to work. Their median hourly wage was about $8 per hour in 2002, or about $16,000 per year. Many families do better, many do worse. For a single mother, though, that's not enough to raise children on--it's hardly a wonder that the poverty rate among single working mothers increased slightly during the "booming" economy in the late 1990s, as women were pushed off welfare to find jobs that paid little. And those jobs are often precarious; an illness or a broken car can easily mean getting fired, with only a shredded safety net to fall back on.

So has work made families better off? The MDRC has done some valuable case studies on the subject and found that, for instance, in Los Angeles "families were not substantially better off financially, even though many parents went to work." And California has one of the more generous state programs around. The flip-side, too, is that now those parents--many of them single mothers--have less time to spend with their kids and someone has to pay for child care.

And what about the children? Well, in Minnesota, which also has one of the more generous TANF programs in the country, reform "had no overall effect on the elementary school achievement of very young children." (Some disadvantaged children in the state saw gains, although note that Minnesota was one of the few states that spent more under its reformed TANF program than it did under the old AFDC system.) The Urban Institute study also noted that "children's outcomes were largely unchanged" nationwide. Just because welfare reform wasn't nearly as disastrous as critics predicted doesn't mean it's done a lot of good.

And what about poverty reduction? In 1999, after welfare reform plus a roaring economy plus new work-support programs like the EITC, the poverty rate was 11.8 percent, which was... the exact same rate as in 1979, under the "bad old welfare" system. (1979, note, was only two years before the Reagan administration started slashing AFDC benefits). Moreover, the black poverty rate--which "reform" was supposed to help reduce--declined faster in the three years before 1996 than it did in the three years after. So what, exactly, did welfare reform accomplish, apart from pushing people who genuinely need assistance off the rolls and saving the government a few bucks? Many liberals will say that welfare reform can and will be a stunning success story if only we increase the Earned-Income Tax Credit and raise the minimum wage and provide heaps more funds for child care and heaps more money for job-training and so on. Well, no kidding. Cup Noodle makes a great meal if it comes with a side of steak. If people are going to be forced to work then the government should make work pay. If society isn't willing to do this, then cash assistance is the way to go.

One of the few things Brad misses is that TANF froze federal welfare spending at its 1995 level. Under the old system, federal welfare spending would have fallen sharply in the late 1990s as the economy strengthened. Thus by 2000 TANF was, in aggregate, a lot more generous than AFDC would have been.

Brad Plumer. Smart guy.

We fear for his soul as he goes to work for We-Love-Ann-Coulter Weekly.

---

MarsEdit: Easy weblog editing

Dean Baker on Judges Behaving Badly

Dean Baker says that he has no trouble seeing mechanisms by which changing government policy has widened the distribution of income in the past generation:

Beat the Press: Income Inequality: Missing Mechanisms: There has been a raging blog debate, following in the wake of some recent Paul Krugman columns, as to whether the rise in income inequality is due to policy or the natural workings of the economy. While Krugman indicated that he believed the policy view (promising details later), many of the economists weighing in have said that they don't see any policy mechanism(s) that could explain the rise in inequality.

Perhaps I have different eyes (or maybe I don't have sufficient training in economics), but I see the mechanisms almost everywhere. There is a nice example in the news today. A judge ruled that Northwest's flight attendants can't go on strike to oppose the wage cuts that the airline is unilaterally imposing following in the wake of its bankruptcy.

In other words, a U.S. judge is telling workers that they will go to jail if they refuse to work for the wages that Northwest wants to pay them. (I know, I'm skipping some steps here.) Judges don't have to threaten workers with jail for refusing to agree to employers' demands. This is a policy decision.

For those who find the labor-management framework difficult to understand, imagine that Northwest purchased flight attendant services from the Flight Attendant Services Corporation (FASC), which is a corporation wholly owned by the workers it employs. Suppose that FASC tells Northwest that it will not provide services for the lower fee it is now offering. Would any judge threaten FASC with jail if it didn't agree to offer its services on Northwest's terms?

There are many other examples of rulings that have gone against labor in the last quarter century. For practical purposes, it is now legal to fire workers for organizing a union (the penalties are a joke). This is not the whole policy story; I have much more in my book, The Conservative Nanny State. It's short and free (and the summary is even shorter), so you have no excuse not to read it, unless you want to remain as ignorant as an NPR reporter your whole life.

I agree with Dean: this is a bad decision. Judge Marrero is letting Northwest forum shop. That the bankruptcy judge--who knows the case and the issues--refused to issue an injunction is as close as we get in this world to certainty that the injunction should not have been issued. This is a judge who is not doing his job properly.

But in a big country this is a (relatively) little decision. My sense (and it is just a guess) is that declining unionization and union power might account for perhaps a fifth of the widening in income inequality; that reductions in the value of the minimum wage might account for a tenth; and that legal changes that have shifted the balance of power within the corporation toward CEOs might account for another tenth. I have a hard time finding other policy changes that have a big impact--and only a portion of declining unionization and union power is due to changes in government policy since the 1970s.

---

Northwest Walkout Is Blocked - New York Times: By JOSEPH B. TREASTER and JEFF BAILEY: A federal judge temporarily blocked a potential strike by flight attendants at Northwest Airlines yesterday and urged the company and its workers to resume contract talks.... The ruling, issued by Judge Victor Marrero of United States District Court in New York, was not permanent but it was a big victory for Northwest management. The airline was facing the prospect of random work stoppages across its international network that could have begun as early as 10:01 p.m. Eastern time last night in an effort by flight attendants to disrupt Northwest operations without calling an across-the-board strike.

Judge Marrero, ruling on a motion by Northwest to enjoin the flight attendants from striking, issued an injunction so that he could further study the legal issues involved. He did not indicate how he might eventually rule....

After a bankruptcy judge declined to enjoin a strike, Northwest, which is based in Eagan, Minn., appealed to the United States District Court in Manhattan, where Judge Marrero sits.

A Lamentable Uncuriosity...

To my right, National Review Online contributor Cathy Seipp:

Cathy's World: Anyway, we got to the 1:45 p.m. movie about 10 minutes early, and were happy that a row of four center seats in the handicapped row were free. If you've never seen this new movie theater arrangement, they leave a row with spaces for wheelchairs and the seats are for the wheelchair people's companions. Had such a group come in, of course we would have made way for them, but as usual none did so I don't see why the seats should go to waste. In any case, I certainly felt entitled....

But around 2 p.m., after the previews were over and the movie was about to start, three old ladies walked in -- no wheelchair, no walkers, not even canes -- and demanded our seats. "No," I said, looking down towards the end of the handicapped row, where there were some empty seat still available. The rest of the row had filled up, as usual, with perfectly able-bodied people. "You can go sit there."

"Are you handicapped?" one demanded, yelling to be heard over the soundtrack.

Luckily, the Fentanyl patch I was wearing was visible near my collarbone (usually it's near the hip) and also pretty obvious because I'd needed to keep it on with rubber tape that day. These pain patches are so powerful (unless you're "opioid tolerant," like me) that they come with rather alarming instructions: If you don't dispose of them exactly right (cut in half and folded over, then flushed down the toilet, even if not used), every drug addict in the county will break into your house, plus all pets and children within a three-mile radius may die. I don't like the idea of the water supply being further contaminated by discarded drugs, though, so I just put them in the trash. "Well," I snapped, "there's enough morphine in this to knock out a horse, and it's still not really working. Does that answer your question?"...

Obviously, the problem was they were hoping to sit in the center instead of off to the side. Since I didn't budge, they grumpily clomped off. But I don't see how being old and slightly weak entitles you to the best seats in the house just because you couldn't be bothered to get to the movie early, or even on time.

I can see it's a problem, though, how to handle that handicapped row. Maybe the theater should keep it roped off until the movie starts and then anyone can sit there. Or an usher could escort a person "needing a little extra assistance" (as the airlines say) to the handicapped row, and offically eject the able-bodied if that's necessary...

To my left, National Review Online contributor John Derbyshire:

John Derbyshire on Conservatism on National Review Online: Liberty vs. equality. There has been no rollback of the tort-spawning, job-killing egalitarianism of the 1990s. Title IX and the Americans with Disabilities Act are still on the books...

I wonder: Does Cathy Seipp know why there are now handicapped rows in movie theaters?

Introducing Serious, Permanent Bugs into Your Wetware

Voluntarily introducing serious, permanent bugs into your wetware...

A previous post contained links to how you could temporarily misprogram part of your wetware--your visual cortex--for amusement.

Here we find Michael Fitzgerald, a man who has seriously misprogrammed substantial chunks of his frontal lobes by reading Karl Marx's Capital--something that, I am becoming convinced, should only be done by somebody with immunity to the mental virus--by a trained intellectual or social or economic historian, or by a trained neoclassical economist.

Jeff Weintraub quotes Michael Fitzpatrick's favorable review of Francis Wheen's "biography" of Karl Marx's Das Kapital:

Jeff Weintraub: Francis Wheen's "Biography" of Marx's Das Kapital: Capital: I first read Capital when I was a student in the mid-Seventies. The onset of recession and an upsurge of trade union militancy... a wave of interest in Marxism and the Marxist theory of capitalist crisis.... I fell in with a small group of people who repudiated... facile arguments and the philistine approach towards theory....

[I]nstead of merely spouting Marxist slogans it was necessary to embark on a deeper study of Marx. So we read Capital. When I say we read Capital, I mean we read Capital, in a group, out loud, line by line, paragraph by paragraph (at least in the early chapters), discussing and arguing over every page, through volumes one, two and three, even unto Theories of Surplus Value....

In retrospect, this approach sounds rather like that of students of the Bible, the Talmud or the Koran, but this was not a process of rote-learning, rather one of active collective engagement with the most important attempt to capture the process of capitalist development in theory. I have never read any other book in this way, but, as Wheen observes, Capital is unique....

[R]eading Capital is not easy.... Marx's dialectical method.... Marx does not present a theory of capitalist crisis as such... process of reproduction of capitalist society in its totality. Capital analyses the dynamics of capitalist production and reveals the limitations of capitalism as a mode of production in its incapacity to develop consistently the productive potential of society and achieve social progress. Marx's dialectical method aims to depict in a theoretical form the development of a social system which is simultaneously a process of producing the material needs of society and a process for ensuring the profitable expansion of value.

Capital begins, famously, with the commodity, "the simplest social form in which the product of labour in capitalist society presents itself". Marx explores the twofold character of the commodity, as use-value and exchange-value, revealing in an elementary form the contradictory character of capitalist production.

This contradictory character... the money form.... The separation of economic processes into two phases--production and exchange--implies "the possibility, and no more than the possibility, of crises". However, "the conversion of this mere possibility into reality is the result of a long series of relations".... The law of value operates in capitalist society as the only possible, albeit indirect, mechanism through which social labour can be distributed. Hence under capitalism... social relations between people appear--and can only appear--as relations between things... market relations conceal the operation of the law of value, the money form conceals the social character of labour... human beings are dominated by the products of their own labour, objects are endowed with supernatural qualities... money acquires divine power... this "fetishism of commodities" meant that it could only be abolished through a fundamental reorganisation of society: "[T]he life process of material production does not strip off its mystical veil until it is treated as production by freely associated men and is consciously regulated by them in accordance with a settled plan."...

Reading Capital provided an invaluable methodological training as we engaged in the campaigns of the late Seventies and the Eighties, seeking to give organisational expression to an anti-capitalist outlook. Having gone back to Marx, we were able to move forward to attempt to grasp new developments in capitalist society through discovering the mediating links between appearances and the inner movement of capital, in the process developing the basic elements of an anti-capitalist programme...

Where does one begin? Let me make two observations only:

First, I observe that the idea that the best way to understand the political economy of the 1970s is through intensive, group, line-by-line study of an unfinished, inconsistent, and ambiguous text first drafted in the 1850s by a very smart, sometimes far-sighted, but definitely not divine human being--that that idea is already a delusion peculiar to those who were a little too good in school in seeking truths from reading books rather than seeking truths from facts.

Second, I observe that Marx's claim that the "twofold character of the commodity, as use-value and exchange-value," is a difficulty in need of "exploration" is a claim that can only be made by a deranged Hegelian mystic. Consider the following thought experiment:

Suppose that at my left hand I had a fresh-cooked hard-shell lobster and a lobster cracker. The lobster cracker would have a lot of use value to me right now: If I didn't have one, then half an hour from now my hands would be bleeding and cut--something I would rather avoid. I would be glad that I had it. But the lobster cracker would have little exchange-value: nobody nearby would exchange for it, would trade for it, anything I would particularly need or want.

Suppose that at my right hand I had a financial portfolio long the shares of residential construction companies, and short mortgage-backed securities. At the moment share of residential construction companies are low, but mortgage default premia are also low. If the shares of residential construction companies are fairly priced, than housing construction and housing prices are in free-fall, defaults on mortgages will rise, and the prices on mortgage-backed securities will fall as well--producing profits on the short position. If mortgage-backed securities are fairly priced, then defaults on mortgages will stay low and housing prices and construction will stay healthy, in which case shares of residential construction companies are underpriced--and there are profits to be expected from the long position. Such a portfolio would have no use-value at all. But it could well--if one could get the hedge ratios right--turn out to have a mighty exchange value, in the sense that other people would be willing to exchange for it, to trade for it, a lot of things I would like to have.

What's the mystery here? What's in need of "exploration"? Things are useful for two reasons (A) Because their physical nature is such that you find them directly useful--that's use value. (b) Because we live in a society in which other people will trade you things for them, things that you can use--that's exchange value. This is not hard to grasp. This is not particularly subtle.

Fitzgerald says that Marx's analysis of use-value and exchange-value "reveal[s] in an elementary form the contradictory character of capitalist production" which requires the abolition of private property and market exchange in order for the "mystical veil" of market prices to be stripped off "the life process of material production" and "production by freely associated men... consciously regulated by them in accordance with a settled plan." In what sense is this dual role of commodities a "contradiction"? Marx never offered me a coherent answer. And Fitzgerald does no better. How would eliminating markets and prices help resolve this "contradiction"? That was never explained either

Moreover, in Fitzgerald's phrase "the contradictory character of capitalist production," the adjective "capitalist" is incorrect. A moment's look back at history reveals that the distinction between use-value and exchange-value is not something invented by or peculiar to the capitalist mode of production: it is found in all human societies, no matter how large or small.

The cattle slaughtered and cooked by the thralls of Hrothgar, King of the Geats, have use-value to Hrothgar: He and his family can eat (some of) them. The cattle have exchange-value to Hrothgar as well: He feeds them to his warriors at their nightly banquets in his great hall of Heorot. In exchange for livery and maintenance, the warriors fight Hrothgar's wars. Success in war gains Hrothgar more thralls, more cattle, and a bigger and better reputation as a great Drighten.

If you try to ground an analysis of capitalism-in-particular on a feature (the distinction between objects' direct usefulness and their role in social processes of reciprocity, redistribution, or market exchange) that capitalism shares with every other human social system--well, you won't get anywhere. And those who read Capital "in a group, out loud, line by line, paragraph by paragraph... discussing and arguing over every page, through volumes one, two and three, even unto Theories of Surplus Value" don't get anywhere at all.

The Macroeconomic Outlook Deteriorates

Paul Krugman is not yet ready to forecast a recession--not quite:

The Bubble Bursts - Krugman - NYT Web Journal: Paul Krugman: Just a wonkish note about how bad the macroeconomics of all this could be:

If you look at the most leading of the indicators on housing, stuff like new home sales and applications for permits, they're off more than 20 percent from a year ago. If that translates into an equivalent fall in residential investment, we're talking about a fall from 6 percent of the G.D.P. to 4.8 percent. And this may be only the beginning; I wouldn't be surprised to see housing investment drop below its pre-bubble norm of 4 percent of G.D.P., at least for a while.

Add to this the likely effect of a housing bust on consumer spending and you've got a direct hit to G.D.P. of, say, 2.5 percent or more. That's bigger than the slump in business investment that led to the 2001 recession. And the main reason the 2001 recession wasn't as deep as some feared was that the Fed was able to engineer... a housing boom. What will the Fed do this time?

Maybe rising business investment and a declining trade deficit will soften the blow. But it's remarkably easy, playing with the numbers, to come up with scenarios in which the unemployment rate rises above 6 percent by the end of 2007. That's not a prediction, but it's well within the range of possibility...