J. Bradford DeLong's Blog, page 345

I am of the "Italy restarts the lira and imposes heavy ta...

I am of the "Italy restarts the lira and imposes heavy taxes on income from euro-denominated debts owed by Italian citizens" school. But the question of how to exit the eurozone is under analyzed. Best solution, of course, is for Germany to reflate; Joseph Stiglitz: How to exit the eurozone: "The challenge... will be to find a way to leave the eurozone that minimizes the economic and political costs...

...A massive debt restructuring, carefully done, with special attention to the consequences for domestic financial institutions, will be essential. Without such a restructuring, the burden of euro denominated debt would soar, offsetting possibly a large part of the potential gains. Such restructurings are a normal part of large devaluations. Sometimes it���s done quietly and obscurely���as when the U.S. went off the gold standard. Sometimes it���s done more openly, as in Iceland and Argentina, with debtors crying foul. But such debt restructurings should be viewed as an inherent risk of cross-border investing, one of the reasons that ���foreign��� bonds often yield a risk premium. From an economic perspective, the easiest thing to do would be for Italian entities (governments, corporations and individuals) to simply redenominate debts from euros into new lira. But because of legal complexities within the EU, and because of Italy���s international obligations, it may be preferable to enact a super-Chapter 11 bankruptcy law, providing expeditious recourse to debt restructuring to any entity for whom the new currency presents severe economic problems. Bankruptcy laws remain an area within the purview of each of the nation states of the EU. Italy could even choose not to announce that it���s leaving the euro. It could simply issue script (say government bonds) that would have to be accepted as payment for any euro debt obligation....

Greece gave into being strangled by the European Central Bank. But it didn���t have to. Athens was already well into creating the infrastructure (an electronics payment mechanism under the new drachma) that would have eased a transition out of the eurozone. Advances in technology over the past three years make creating electronic currency systems all the easier and more effective. Should Italy choose to use one, it wouldn���t even have to face the difficulties of printing new currency....

The cost of persistent unemployment, especially among its youth, is enormous. Young people in their 20s and early 30s should be honing their skills in on-the-job training. Instead, they are sitting home idle, many of them developing a resentment toward the elites and the institutions they blame for their predicament. The resulting lack of formation of human capital will also dampen productivity for years to come. In an ideal world, Italy wouldn���t have to leave the eurozone. Europe could instead reform the currency union and provide better protection for those adversely affected by trade and migration. But in the absence of a change of direction by the EU as a whole, Italy needs to remember that it has an alternative to economic stagnation and that there are ways of leaving the eurozone in which the benefits would likely exceed the costs...

#shouldread

Edward Bellamy: How I Came to Write Looking Backward: Weekend Reading

Edward Bellamy (1889): How I Came to Write _Looking Backward: "I accept more readily the invitation to tell in _The Nationalist how I came to write Looking Backward for the reason that it will afford an opportunity to clear up certain points on which inquiries have been frequently addressed to me...

...I never had, previous to the publication of the work, any affiliations with any class or sect of industrial or social reformers nor, to make my confession complete, any particular sympathy with undertakings of the sort. It is only just to myself to say, however, that this should not be taken to indicate any indifference to the miserable condition of the mass of humanity, seeing that it resulted rather from a perception all too clear of the depth and breadth of the social problem and a consequent skepticism as to the effectiveness of the proposed solutions which had come to my notice.

In undertaking to write Looking Backward I had, at the outset, no idea of attempting a serious contribution to the movement of social reform. The idea was of a mere literary fantasy, a fairy tale of social felicity. There was no thought of contriving a house which practical men might live in, but merely of hanging in mid-air, far out of reach of the sordid and material world of the present, a cloud-palace for an ideal humanity.

In order to secure plenty of elbow room for the fancy and prevent awkward collisions between the ideal structure and the hard facts of the real world, I fixed the date of the story in the year AD 3000. As to what might be in AD 3000 one man's opinion was as good as another's, and my fantasy of the social system of that day only required to be consistent with itself to defy criticism. Emboldened by the impunity my isolated position secured me, I was satisfied with nothing less than the whole earth for my social palace.

In its present form the story is a romance of the ideal nation, but in its first form it was a romance of an ideal world. In the first draft of Looking Backward, though the immediate scene was laid in America (in Asheville, North Carolina, instead of Boston, by the way), the United States was supposed to be merely an administrative province of the great World Nation, whose affairs were directed from the World Capital which was declared to be the city of Berne, in Switzerland. The action of the story was made to begin in the thirtieth century.

The opening scene was a grand parade of a departmental division of the industrial army on the occasion of the annual muster day when the young men coming of age that year were mustered into the national service and those who that year had reached the age of exemption were mustered out. That chapter always pleased me and it was with some regrets that I left it out of the final draft. The solemn pageantry of the great festival of the year, the impressive ceremonial of the oath of duty taken by the new recruits in presence of the world-standard, the formal return of the thanks of humanity to the veterans who received their honorable dismissal from service, the review and march past of the entire body of the local industrial forces, each battalion with its appropriate insignia, the triumphal arches, the garlanded streets, the banquets, the music, the open theatres and pleasure gardens, with all the features of a gala day sacred to the civic virtues and the enthusiasm of humanity, furnished materials for a picture exhilarating at least to the painter.

The idea of committing the duty of maintaining the community to an industrial army, precisely as the duty of protecting it is entrusted to a military army, was directly suggested to me by the grand object lesson of the organization of an entire people for national purposes presented by the military system of universal service for fixed and equal terms, which has been practically adopted by the nations of Europe and theoretically adopted everywhere else as the only just and only effectual plan of public defense on a great scale. What inference could possibly be more obvious and more unquestionable than the advisability of trying to see if a plan which was found to work so well for purposes of destruction might not be profitably applied to the business of production now in such shocking confusion.

But while this idea had for some time been vaguely floating in my mind, for a year or two I think at least, I had been far from realizing all that was in it, and only thought then of utilizing it as an analogy to lend an effect of feasibility to the fancy sketch I had on hand. It was not till I began to work out the details of the scheme by way of explaining how the people of the thirtieth century disposed of the awkward problems of labor and avoided the evils of a classified society that I perceived the full potency of the instrument I was using and recognized in the modern military system not merely a rhetorical analogy for a national industrial service, but its prototype, furnishing at once a complete working model for its organization, an arsenal of patriotic and national motives and arguments for its animation, and the unanswerable demonstration of its feasibility drawn from the actual experience of whole nations organized and manoeuvred as armies.

Something in this way it was that, no thanks to myself, I stumbled over the destined cornerstone of the new social order. It scarcely needs to be said that having once apprehended it for what it was, it became a matter of pressing importance to me to show it in the same light to other people. This led to a complete recasting, both in form and purpose, of the book I was engaged upon. Instead of a mere fairy tale of social perfection, it became the vehicle of a definite scheme of industrial reorganization. The form of a romance was retained, although with some impatience, in the hope of inducing the more to give it at least a reading. Barely enough story was left to decently drape the skeleton of the argument and not enough, I fear, in spots, for even that purpose.

A great deal of merely fanciful matter concerning the manners, customs, social and political institutions, mechanical contrivances, and so forth of the people of the thirtieth century, which had been intended for the book, was cut out for fear of diverting the attention of readers from the main theme. Instead of the year AD 3000, that of AD 2000 was fixed upon as the date of the story. Ten centuries had at first seemed to me none too much to allow for the evolution of anything like an ideal society, but with my new belief as to the part which the National organization of industry is to play in bringing in the good time coming, it appeared to me reasonable to suppose that by the year 2000 the order of things which we look forward to will already have become an exceedingly old story. This conviction as to the shortness of the time in which the hope of Nationalization is to be realized by the birth of the new, and the first true, nation, I wish to say, is one which every day's reflection and observation, since the publication of Looking Backward, has tended to confirm.

The same clearer conviction as to the method by which this great change is to come about, which caused me to shorten so greatly my estimate of the time in which it was to be accomplished, necessitated the substitution of the conception of a separate national evolution for the original idea of a homogeneous world-wide social system. The year 3000 may, indeed, see something of that sort, but not the year 2000. It would be preposterous to assume parity of progress between America and Turkey. The more advanced nations, ours surely first of all, will reach the summit earliest and, reaching strong brotherly hands downward, help up the laggards...."

#weekendreading
#books
#utopia

Alex Barker and Peter Campbell: Honda faces the real cost...

Alex Barker and Peter Campbell: Honda faces the real cost of Brexit in a former Spitfire plant: "Honda operates two cavernous warehouses.... They still only store enough kit to keep production of the Honda Civic rolling for 36 hours...

...This is the Japanese carmaker���s breathing space, and after a hard Brexit it might need to be bigger���much, much bigger. Proud managers describe 2m components ���flowing like water��� to the factory line every working day.... Honda now fears that the border checks that could be introduced as a result of Brexit will clog up the process. If Britain were to leave the customs union, Honda estimates European parts will take a minimum of two to three days to reach the plant, and possibly as long as nine days. Delivery times of finished cars may be just as unpredictable.... With nine months left before Britain���s exit and Westminster still undecided on the direction Brexit should take, the warnings are becoming increasingly blunt, and despairing.��Airbus, BMW, Honda���blue-chip manufacturers in Britain are raising the alarm....

Honda exports��about half its Swindon-made cars to the US���giving it just the kind of global outlook championed by Brexiters. ���There is some opportunity,��� says Justin Benson, head of UK automotive at KPMG. A weaker pound, he adds, could improve competitiveness and ���see an upside for exports���.... Just 25 per cent of the Civic model is now ���true UK content���.... The carmakers would never have developed these plant networks if they knew Britain planned to leave the EU���s customs union or single market.�� ���I don���t think it���s feasible for the carmakers to carry on running the supply chains they currently do if that happens,��� says Tim Lawrence, global head of manufacturing at the PA Consulting group. ���It���s just not going to work.���...

Honda will soon be reviewing the plans for its next Civic model, which is due around 2021. In theory, it would be glad to source more parts from within the UK and Brexit provides an opportunity to do just that. But it would take��years���perhaps even a decade���to shift more supply to the UK, even if the parts companies were willing. Mr Howells warns the UK supply base is ���shallow��� and more orders from Britain alone may not be a big enough incentive to deepen it...

#shouldread

Paul Krugman: Uses and Abuses of Economic Formalism: "Gru...

Paul Krugman: Uses and Abuses of Economic Formalism: "Gruen... really, really doesn���t like the formalization of economies of scale and imperfect competition in trade that went along with the rise of the 'new trade theory'...

...compares it to the excessive faith in formalism that I myself have condemned in much of macroeconomics.
Obviously I don���t think that���s fair.... What the freshwater school did was to take the actual experience of business cycles and say, ���We don���t see how to formalize this experience in terms of maximizing equilibrium models; therefore it doesn���t exist.��� It only looks as if recessions result from inadequate demand and that monetary or fiscal expansion can create jobs; our models tell us that can���t happen, so it���s all an optical illusion. This attitude, I���ve argued, had major negative consequences, not just for research, but for policy: it helped cultivate a sense of learned helplessness in the face of mass unemployment.

What about new trade theory? What us new trade theorists did was say, ���It looks as if there���s a lot going on in world trade that can���t be explained in existing formal models. So let���s see if there���s a different approach to modeling that can make sense of what we see.��� In other words, the attitude toward formalization was almost the opposite of the macro wrong turn: it was there to help clarify our reality sense, not deny it. Now, we can argue about how much good this formalization did. I still believe that the formal models provided a level of clarity and legitimacy to trade discussion that wasn���t there before; your mileage may differ.... One thing new trade theory certainly didn���t do was lend support to really bad idea... [or] divert trade economists away from studying the real world....

The important point shouldn���t be ���don���t formalize���; it should be that formalism is there to open your mind, not close it, and if the real world seems to be telling you something inconsistent with your model, the problem lies in the model, not the world...

#shouldread

Lawrence Summers (1994): Foreign Aid: Why Do It? And What...

Lawrence Summers (1994): Foreign Aid: Why Do It? And What Works?: "When the history of the final twenty years of the twentieth century is written, there will be two big stories: the end of the cold war and the transformation of the developing nations...

...It is only a slight exaggeration to say that this is the era when 3 billion people got on a rapid escalator to modernity.

Our discussion of foreign aid should start with the recognition that what is happening in the world's emerging markets is probably more important for U.S. interests than it has been at any time in the past fifty years. The maintenance of and support for stable prosperity in those parts of the world where progress is under way is central to the American purpose in the world. Here are five observations on the process of foreign assistance and the promotion of those objectives.

To have important effects, policy needs to be leveraged. Even the Marshall Plan financed less than 5 percent of the investment that took place in Western Europe during the late 1940s. Achieving maximum leverage today means transferring knowledge about such subjects as securities markets, bank supervision, and educational reform but also making assistance conditional on policy reforms in the recipient countries.

There is a central role for administering multilateral assistance through international financial institutions. Last year's U.S. contribution to those institutions--about $2 billion--provided about $60 billion in program support, as well as a good deal of technical assistance and policy dialogue.

Global problems represent an important item on the U.S. international agenda. Whether it is the security problem associated with extreme poverty, refugee relief, responses to environmental disasters, or even a cure for AIDS, we are moving toward increased assistance in these areas of global concern.

U.S. foreign aid should adapt to changes in the private capital market. There still are too many countries for which de facto U.S. policy remains aid, not trade. That is surely wrong if one believes in promoting the private sector.

Investments in people do matter. Increased education for girls, for example, would more than repay its costs purely as a family planning program, but since it is also a public health program and an investment in the next generation, it may well be the highest return investment that we and others can support.

#shouldread
#economicdevelopment
#twentiethcenturyeconomichistory
#economicgrowth
#equitablegrowth

(i) Free trade, (ii) the industrial research lab, (iii) t...

(i) Free trade, (ii) the industrial research lab, (iii) the gold standard, and (iv) high finance to lobby for peace and channel money to r��gimes that played by the rules of the game���those were the key stabilizing institutions of Gold Standardism. (i) Labor unions, (ii) Keynesian demand management, (iii) social insurance, and (iv) high-throughput oligopolistic assembly-line manufacturing���those were the key stabilizing institutions of Fordism.

So what are the next key stabilizing institutions? There is no guarantee that there will be any. There was, after all, a 33-year gap between the breakdown of Gold Standardism in 1913 and the first clear signs of the successful construction of Fordism in 1946. If we see 2000 as the last gasp of successful Fordism... then we may have a long slog. For who in 1913 would have predicted the future and bet that labor unions, Keynesian demand management, social insurance, and high-throughput oligopolistic assembly-line manufacturing were the key institutions to be building?:

Nicolas Colin: Doom, or Europe���s Polanyi Moment?: Polanyi���s... The Great Transformation... is really about the social and economic institutions that are necessary to support the market system and to make economic development more sustainable and inclusive...

...The ���Great Transformation��� in and of itself is the painful process a society must go through to imagine and set up these indispensable institutions���a process that includes softer ways, like elections and collective bargaining, but also more destructive paths, like fascism and war. What Polanyi describes in his book is in fact the long economic transition between two very different worlds. One is the 19th century gold standard economy, whose prosperity culminated in the US during the Gilded Age. The other is the 20th century Fordist economy that only found its balance���and entered its Golden Age���after most developed countries had imagined and implemented the proper social and economic institutions in the wake of World War II���that is, after Polanyi finished writing his book....

As Joseph Stiglitz wrote in the introduction to a recent edition of Polanyi���s book, ���rapid transformation destroys old coping mechanisms, old safety nets, while it creates a new set of demands, before new coping mechanisms are developed.��� Indeed the first half of the 20th century was marked by the long and violent crisis that saw a confrontation between two very powerful movements.... A country approaching the fascist phase showed [common] symptoms, among [them] the spread of irrationalistic philosophies, racialist aesthetics, anticapitalistic demagogy, heterodox currency views, criticism of the party system, widespread disparagement of the ���regime,��� or whatever was the name given to the existing democratic setup.... These are the bare outlines of a complex picture in which room would have to be made for ���gures as diverse as the Catholic freelance demagogue in industrial Detroit [antisemitic Catholic priest Charles Coughlin], the ���King���sh��� in backward Louisiana, Japanese Army conspirators, and Ukrainian anti-Soviet saboteurs. Fascism was an ever-given political possibility, an almost instantaneous emotional reaction in every industrial community since the 1930s....

Yet another sign of a Polanyi moment is the dispute around what would be the best remedy to the multi-dimensional crisis we are currently going through. Like what happened in the 1930s between the elite who advocated restoring laissez-faire and the labor movement, we are currently seeing two movements at odds with each other. On one side are those who would like to restore the old Fordist economic order.... On the other side are those who reckon that we are undergoing another ���Great Transformation���. For them, it���s high time we begin to tackle many difficult institutional challenges so as to support the growth of the digital economy instead of fighting it: imagining a new welfare state, a new financial system, a new tax system, new regulations, and upgraded infrastructures...

June 26, 2018: Ten Years Ago on Grasping Reality

Hoisted from Comments: J. Thomas on the Ethics of William Greider: "If Greider had told his reporters 'The headline for today's article is "Supplyside Scandal Exposed"' and they were supposed to point out known administration lies as lies and use the word 'scandal' at least 4 times per article... But he didn't. The articles he edited encouraged fools to continue acting like fools. He got the truth straight from Stockman's mouth and he reported the lies instead. Is there something about these events that you don't believe? Is there something about my interpretation that you disagree with? If you agree the events happened, what interpretation leaves Greider a nonhack?"

Stan Collender on Republican Attack Dog Robert Dole: Robert Dole never outgrew his role as Nixon's henchman. Here's Stan Collender: "Dole returned the call. He didn���t apologize for what he had done but did say that I shouldn���t take it personally. He said my quote in the Inquirer was being used too effectively for it to be ignored and that he had wanted to limit the damage during the budget resolution debate by hurting my credibility. He then suggested I stop by his office for coffee..."

Jay Rosen Says that the Press Corps Heads for the Greasy Grass...: I think that the press corps's flaws are much deeper than that--it's not just that it doesn't understand the new ground to which it is migrating, it's that it did a lousy job on its own ground as well.... [It's not that its] problems have anything to do with "new media." They all consist of doing old media badly.

Paul Krugman: Iron resolution: "Iron resolution: Chinese steelmakers have agreed to a 96 percent increase in the price they pay for Australian iron ore. One interesting point about this case is that, as I understand it, iron ore isn���t traded on an international exchange; trade takes place through bilateral deals between producers and consumers. In other words, there isn���t any easy way to speculate on future iron ore prices. Yet ore prices are surging like oil prices. A bit more evidence against the speculative frenzy hypothesis..."

Marty Lederman Gets Shrill on John Yoo: "3. John stresses, as he has in the past, that he was without much guidance in interpreting the federal torture statute, since there had not been any prosecutions under it, or any court cases construing it. But the virtually identical definition of 'torture' is included in statutes governing removal of aliens and asylum applications, and that definition had received extensive treatment from courts under those statutes (which were also enacted in order to implement the Convention Against Torture). The INS and the State Department, therefore, had very extensive knowledge and expertise on the question. And yet those experts were cut out of the loop���they were not consulted on the OLC opinion..."

#tenyearsagoongraspingreality

Jo Mannies: On Twitter: "At Truman Dinner, @clairecmc ask...

Jo Mannies: On Twitter: "At Truman Dinner, @clairecmc asks everyone to stand up who has a preexisting condition. Notes GOP wants to eliminate insurance coverage for them. Most of ballroom stands up:..."

#shouldread

Josh Rogin: On Twitter: "In a private meeting, Swedish PM...

Josh Rogin: On Twitter: "In a private meeting, Swedish PM Stefan Lofven explained to Trump Sweden is not a member of NATO, but sometimes partners with the alliance. Trump responded that the U.S. should consider the same approach..."

#shouldread

Erin Hengel: Kenneth Arrow on competition driving out dis...

Erin Hengel: Kenneth Arrow on competition driving out discrimination: "If any firms do not discriminate at all, these would be the only firms to survive the competitive struggle. Since racial discrimination has survived for a long time, we must assume that this model has some limitations..."

#shouldread