Sunday, December 20, 2015

The Plutocracy Awakens

There once was a land that now seems from long ago and far away.  In that society, the inhabitants had endured an evil period with a long war and an extended period of economic deprivation.  They learned the hard way that a healthy and robust society requires a sense of community in which the concept of “the common good” reigns.  This society organized itself in such a way that the weak and the unlucky were not allowed to suffer too much and the strong and the lucky were not allowed to profit too much from their circumstances.  However, the strong and lucky, before the evil times, had used their circumstances to increase their wealth far beyond that of the majority of the people.  They would eventually want to return to their previous position of wealth and power.

Daniel T. Rodgers, in his book Age of Fracture, has documented the means by which the wealthy and the lucky would transform society from one focused on the common good to one focused on the individual good.

“In this reading of late-twentieth century U.S. history, the key to the age was the conscious efforts of conservative intellectuals and their institutional sponsors to reshape not only the terms of political debate but the mechanics of intellectual production itself.   By the late 1970s, Nixon’s former secretary of the Treasury, the Wall Street investor William E. Simon, was urging that ‘the only thing that can save the Republican Party….is a counterintelligentsia,’ created by funneling funds to writers, journalists, and social scientists whose ideas had been frozen out of general circulation by the ‘dominant socialist-statist-collectivist orthodoxy’ prevailing in the universities and media.”

The wealthy wrapped themselves in the mantel of conservatism, but the goal was to shed any constraints on businesses and initiate a new era of wealth accumulation.  And with increased wealth would come increased power.

“Within a decade, Simon’s project had dramatically reshaped the production and dissemination of ideas.  Older foundations, Simon’s Olin Foundation in the lead, turned into conscious incubators of new conservative ideas, publicizing books and sponsoring authors, subsidizing student organizations and newspapers, and establishing university positions and programs for the promotion of ideas more favorable to business enterprise, all with the intent of changing the prevailing terms of debate.  With corporate and entrepreneurial support, a global network of conservative think tanks proliferated to advance market sympathetic ideas and speed their way aggressively into media and political debate.  Journals and newspapers were floated on new conservative money.”

Rodgers concludes that this strategy was broadly successful in altering how individuals viewed their relationship to society as a whole.

“The work of the conservative idea brokers changed the landscape of publication and intellectual argument….In some areas—the law and economics movement in the legal faculties, the hardening terms of debate over policy toward the poor, the creation of the Federalist Society as a fraternity of like-minded law students and faculty, and the elaboration of a neoconservative foreign policy—the work of the conservative intellectual establishment was decisive.”

Rodgers recognizes that a plutocratic minority was successful at influencing society in a way that enhanced their prospects, but he does not favor the notion that the major transformation of society can be attributed to them.  He provides an alternate starting point.

“In this reading of the age, the precipitant of its cultural and intellectual transformations was the collapse of the high-wage, high-benefits ‘Fordist’ economy that had dominated post-World War II American society.”

Rodgers seems to think that the “collapse” was the result of the operation of some fundamental economic law rather than being initiated due to the wishes of plutocrats with the power to make things happen.

Wealth provides political power and political power produces more wealth….and so on.

Perhaps a better understanding of society’s current state can be obtained by turning away from academics and listening to those who preach the gospel of the individual good.  In one of the recent Republican debates Donald Trump was asked if it was appropriate for him to have contributed money to the campaigns of Democrats.  He replied—in so many words—when politicians asked him for money he gave it to them—all of them.  And later, when he needed something, he asked them for it and they gave it to him.  No one was surprised or disconcerted by the comment.

And so the plutocracy came to rule the land.

Wednesday, December 16, 2015

The Perverse Assumption That Low Unemployment Causes Inflation

One might believe, naively, that when an economist talks about full employment, a state where everyone has a job is being described.  In fact, most economists believe that low unemployment can be a dangerous situation that inevitably leads to runaway inflation.  Consequently, they have created a level of unemployment that is deemed safe and described it with a number of terms such as “full employment,” the “natural rate of unemployment,” “structural unemployment,” and the phrase constructed to imply an unwarranted level of precision: Non-Accelerating Inflation Rate of Unemployment (NAIRU).  The theory behind these concepts holds that there will always be a non-zero rate of unemployment as people leave jobs in order to look for better ones, and there will always be people who are unemployable due to a mismatch in skills possessed and skills required in the labor market. 

This summary of the concept is provided by Wikipedia.

“It is defined by the majority of mainstream economists as being an acceptable level of unemployment somewhere above 0%. The discrepancy from 0% arises due to non-cyclical types of unemployment, such as frictional unemployment (there will always be people who have quit or have lost a seasonal job and are in the process of getting a new job) and structural unemployment (mismatch between worker skills and job requirements). Unemployment above 0% is seen as necessary to control inflation in capitalist economies, to keep inflation from accelerating, i.e., from rising from year to year. This view is based on a theory centering on the concept of the Non-Accelerating Inflation Rate of Unemployment (NAIRU); in the current era, the majority of mainstream economists mean NAIRU when speaking of "full" employment. The NAIRU has also been described by Milton Friedman, among others, as the "natural" rate of unemployment.”

The NAIRU is a quantity that is a function of current reality, which is a moving target that also is dependent on concurrent public policies.  To provide an indication of what economists do with this concept, the article provides some NAIRU values produced by the OECD.

“For the United Kingdom, the OECD estimated the NAIRU (or structural unemployment) rate as being equal to 8.5% on average between 1988 and 1997, 5.9% between 1998 and 2007, 6.2%, 6.6%, and 6.7 in 2008, 2009, and 2010, then staying at 6.9% in 2011-2013. For the United States, they estimate it as being 5.8% on average between 1988 and 1997, 5.5% between 1998 and 2007, 5.8% in 2008, 6.0% in 2009, and then staying at 6.1% from 2010 to 2013.”

Others will produce different NAIRU values, but the basic point is that economists insist that unemployment be kept at a significant nonzero rate in order to provide stability to the economy.  Note that the current rate of unemployment in the United States is viewed as getting dangerously low according to the NAIRU concept.  Consequently, there are those who demand that that the Federal Reserve raise interest rates to head off the threat of runaway inflation—and in so doing increase the number of unemployed in the nation. 

Those who are still seeking employment might be a bit startled to learn what economists have in store for them.  The author of the article thought it necessary to include a comment from Keynes on the subject of a nonzero ideal unemployment rate.

"The Conservative belief that there is some law of nature which prevents men from being employed, that it is 'rash' to employ men, and that it is financially 'sound' to maintain a tenth of the population in idleness for an indefinite period, is crazily improbable - the sort of thing which no man could believe who had not had his head fuddled with nonsense for years and years. The objections which are raised are mostly not the objections of experience or of practical men. They are based on highly abstract theories – venerable, academic inventions, half misunderstood by those who are applying them today, and based on assumptions which are contrary to the facts… Our main task, therefore, will be to confirm the reader’s instinct that what seems sensible is sensible, and what seems nonsense is nonsense."

The article in Wikipedia also provides us with the oft-forgotten fact that legislation by congress also provides the Federal Reserve and federal legislators with a level of unemployment that it is supposed to target with policy moves.  Such a target is incorporated in the Full Employment and Balanced Growth Act of 1978.

“The law states that full employment is one of four economic goals, in concert with growth in production, price stability, balance of trade, and budget, and that the US shall rely primarily on private enterprise to achieve these goals. Specifically, the Act is committed to an unemployment rate of no more than 3% for persons aged 20 or over and not more than 4% for persons aged 16 or over (from 1983 onwards), and the Act expressly allows (but does not require) the government to create a "reservoir of public employment" to effect this level of employment.”

“However, since the passage of this Act in 1978, the US has, as of 2012,….never achieved this level of employment on the national level, though some states have neared it or met it, nor has such a reservoir of public employment been created.”

The goals of this law are clearly broader than the single issue of price stability, yet the media, congress, and many members of the Federal Reserve policy team allow a bunch of economists “fuddled with nonsense” to control the discussion.

Peter Coy provided an article for Bloomberg Businessweek that addressed the pressure on the Fed to raise interest rates: Will the Jobs Boom End Too Soon?

Coy opened with this lede.

“People who have a hard time landing jobs are finally getting hired. A Fed hike may stop that.”

Coy is pointing out that there are people in society who are rendered unable to be the “rational” participants in the labor market that economic theoreticians demand. These include minorities, those with a criminal record, the disabled, and those lacking at least a high school diploma.

“Employers can be blinded by habit or discrimination. They fish in the small pool of their preferred job candidates rather than consider less-familiar applicants. The plight of black college graduates illustrates the problem. Even though college graduates in general are only half as likely to be unemployed as high school grads, in October black college grads were slightly more likely to be unemployed than white high school grads, according to Bureau of Labor Statistics data.”

“As the labor market tightens across the country, employers are stepping up their hiring of people who often have a hard time landing jobs: ex-convicts, people with disabilities, African Americans, Hispanics, teenagers, and those without a high school education. Starbucks, for example, is leading a coalition of more than 30 companies facing talent shortages that have committed to giving jobs or apprenticeships to 100,000 ‘opportunity youth’—young people who are out of school and out of work. ‘When the items are flying off your shelves and you can’t keep up, you get a little more open-minded’ about whom you hire, says Laurence Ball, a Johns Hopkins University economist.”

The notion of a non-zero “natural” rate of unemployment weighs heavily in Fed policy deliberations.

“The betting is still that the Federal Open Market Committee will raise interest rates at its Dec. 15 to 16 meeting and continue to nudge them higher sporadically thereafter. One reason is that Milton Friedman, the late, great conservative economist, continues to loom large at the Fed. In his presidential speech to the American Economic Association in 1968, Friedman said there’s no free lunch: Efforts to suppress the unemployment rate below what he called its natural level might work briefly but are destined to fail eventually, resulting in nothing over the long run but spiraling inflation.”

“The ghost of Friedman lives on in a computer model the Fed’s staff consults in making economic projections. It builds in an assumption that very low unemployment will result in unacceptably high inflation. The latest version projects that all the extra labor and other resources in the economy will be used up by early next year, which, if true, implies upward pressure on wages and prices, says Michael Gapen, chief U.S. economist at Barclays.”

The net effect of the concept of a “natural” rate of unemployment, and the conservative claims as to what that rate should be, is to condemn a significant number of people to a lifetime of unemployment. Those who employers traditionally discriminate against are also discriminated against by those who base policy decisions on the unproven assumptions of economists.

As Coy points out, the Fed has the choice of deciding which of its policy goals to focus on. Is keeping inflation low more important than decreasing unemployment?

“Yet as the great pivot toward fighting inflation begins, U.S. employment remains far from full. The jobless rate for blacks, 9.2 percent in October, was equal to the highest that the white unemployment rate got in 2009, when joblessness was still considered a national emergency. Chronic unemployment is deeply damaging, says Joseph Carbone, chief executive officer of WorkPlace, a nonprofit based in Bridgeport, Conn., that trains and places the long-term unemployed. ‘You get complacent, detached. You lose skills,’ he says. ‘Depression and family difficulties develop. They militate against your being successful’.”

Coy provides this appropriate conclusion.

“Ultimately, how hot to run the U.S. economy comes down to a judgment about what’s important. The Fed’s decisions, while couched in the antiseptic language of monetary economics, are unavoidably bound up in hard questions about fairness, race, and inequality.”

As this piece was being written, the Fed announced a small—initial—increase in interest rates.  There are no blacks, Hispanics, ex-felons, or disabled in economic models.  Simple theories demand simple conditions.  However, economists need not be blind to the real world due to their inadequate education.  There are conditions out there that demand solutions balancing a variety of social goals.

Friday, December 11, 2015

Why We Should Raise the Legal Smoking Age to 21

Taking certain actions seem to be such an obviously good idea that one is occasionally startled to realize that they haven’t happened.  Bloomberg Businessweek created such a moment when a brief editorial comment was encountered in a recent issue: Raise the Smoking Age to 21.  

The Centers for Disease Control and Prevention have been tracking smoking as a deadly disease for a long time, and the path to addiction is clear.  This document provides this insight.

“Nearly 9 out of 10 cigarette smokers first tried smoking by age 18, and 99% first tried smoking by age 26.”

And it provides this perspective on the lives of smokers.

“CDC analyzed 2010 National Health Interview Survey (NHIS) data to describe U.S. adult smokers' interest in quitting, quit attempts in the past year, successful recent smoking cessation, and use of evidence-based cessation treatments and services by demographic characteristics. This report describes the results of that analysis, which found that 68.8% of current smokers want to completely stop smoking, 52.4% of smokers had made a quit attempt in the past year, and 6.2% of smokers had successfully quit within the past year.”

So, developing a smoking addiction is a young person’s problem, but once hooked, most spend the rest of their lives trying to escape from the filthy habit. 

It seems obvious that every step should be taken to eliminate access to tobacco products by young people.  This need not be totally effective in order to produce a reduction in addiction.  Developing a need for a drug like nicotine is a complex process.  One does not smoke one cigarette and become addicted.  It requires frequent use of the drug plus social support for the habit (peer pressure) in order to take hold.

Any action that makes frequent smoking difficult is likely to be beneficial.  The Bloomberg Businessweek article provides this background information.

“Hawaii became the first state to make this change after observing the success of the first such local law, in Needham, Massachusetts. Since Needham's ordinance was adopted in 2005, youth smoking there has fallen by more than half. In 2013, New York became the first big city to follow suit (under then-mayor Michael Bloomberg, the founder and majority owner of Bloomberg LP). Today, nearly 100 localities in eight states have done so, and more are considering it. States have been slower to act; the California Senate passed such a bill this summer, and the Massachusetts legislature is also weighing the change.”

It also provides an argument to be used on critics of the 21 year age limit.

“Critics make a familiar counterargument: If 18-year-olds can vote and serve in the military, why can't they light up? It's a fair point. This age group also can't drink alcohol, however, and the case for limiting access to tobacco is even stronger, because there's no safe level of tobacco use.”

The article provides a compelling reason for raising the age limit.  Who knows more about getting young people addicted to tobacco products than the tobacco companies?

“….a Philip Morris memo from the 1980s warned, ‘Raising the legal minimum age for cigarette purchaser to 21 could gut our key young adult market (17-20)’."

Wednesday, December 2, 2015

Star Wars, the Demise of the Soviet Union, and Scientist Salesmen

Ashlee Vance produced an article in Bloomberg Businessweek to note that a current scientist/inventor had just received a patent that brought his count to one more than the number of patents granted to Thomas Edison.  The article appeared in print under the title Polymath Who Dreams Up more Contraptions than Edison.  It carried this as a subtitle.

“The work and ideas of Lowell Wood, America’s most prolific inventor.”

The online version of the article was changed to How an F Student Became America’s Most Prolific Inventor, and a new subtitle was provided.

“Lowell Wood broke Edison’s patent record and helped bring down the Soviet Union.”

Vance makes clear the fact that Lowell Wood is indeed very bright and very inventive.  However, the claim of helping bring down the Soviet Union seems a bit of a stretch.  In addition, some of the statements attributed to Wood in the article suggest a role more reprehensible than heroic.

Lowell Wood joined Lawrence Livermore National Laboratory (LLNL) in 1972.  LLNL was one of the two laboratories developing nuclear devices for weapon applications.  Edward Teller, at the time, resided there part time as a kind of “associate director at large.”  In 1975 he was named Director Emeritus.  Teller had a long history in the nuclear weapons program stretching back to the Manhattan Project.  He was a long-time advocate of continued research in new applications of nuclear devices, and was well-connected with political and military leaders.  It was inevitable that Teller and Wood would find each other. 

Vance describes Wood as a protégé of Teller.

“Wood worked on projects ranging from spacecraft to the use of gamma rays to place hidden watermarks on objects.  Then came the Star Wars project, officially known as the Strategic Defense Initiative, for which Wood pushed a team of scientists to build a weapons system capable of detecting and destroying Russian intercontinental ballistic missiles midflight.”

Vance does not provide much detail about the role of Teller and Wood in the Star Wars effort, other than to mention that it was controversial.

“Historians and journalists have not been kind to Teller, one of the most polarizing figures of the cold war, and Wood often gets lumped in with him as a fringe science lunatic, especially when it comes to Star Wars.  After billions of dollars and years of controversy, the initiative never made it out of the lab.”

Fortunately, Wikipedia provides much information about Star Wars activities.  In fact, Teller was so well connected that he could go directly to President Reagan and use the work of Wood and his group to convince him of the viability of the program.  From Wikipedia,

“The initial focus of the strategic defense initiative was a nuclear explosion-powered X-ray laser designed at Lawrence Livermore National Laboratory by a scientist named Peter L. Hagelstein who worked with a team called 'O Group', doing much of the work in the late 1970s and early 1980s. O Group was headed by physicist Lowell Wood, a protégé and friend of Edward Teller.”

“Ronald Reagan was told of Hagelstein's breakthrough by Teller in 1983, which prompted Reagan's March 23, 1983, "Star Wars" speech. Reagan announced, "I call upon the scientific community who gave us nuclear weapons to turn their great talents to the cause of mankind and world peace: to give us the means of rendering these nuclear weapons impotent and obsolete."

One does not know exactly what Reagan was told, but one can assume that Teller was not hesitant in describing the scientific wonders that were on the horizon.  Again from Wikipedia,

“Some time later Teller used similar language in a letter to Paul Nitze, who was preparing a new round of strategic limitations talks, stating that ‘A single X-ray laser module the size of an executive desk... could potentially shoot down the entire Soviet land-based missile force….’”

The controversy referred to by Vance arose because many believed that Teller and Wood had underplayed the technical difficulties associated with their anti-missile concept and oversold the probability of success.  From Wikipedia,

“Scandal erupted when Teller (and his associate Lowell Wood) were accused of deliberately overselling the program and perhaps had encouraged the dismissal of a laboratory director (Roy Woodruff) who had attempted to correct the error.   His claims led to a joke which circulated in the scientific community, that a new unit of unfounded optimism was designated as the teller; one teller was so large that most events had to be measured in nanotellers or picotellers.”

It is not uncommon for scientists to be overoptimistic about projects they propose for funding, but the threat from peer review keeps them within reason.  The nature of the joke about the “teller” unit suggests that those in the know believed Teller and Wood missed their goal by many powers of ten.

Vance was surprised that Wood was willing to talk about what might be viewed as a very expensive and embarrassing failure.  What he had to say is startling to say the least.

“Wood is quick to suggest that he knew all along that the system, while technically feasible, was too complex and expensive to be practical.  It was mainly for show, he says—a feint that broke the enemy’s morale and treasury.  ‘I went into it with my eyes wide open, and I did the job,’ he says.  ‘I got the result that I wanted.  The Soviet Union collapsed.  Check.  It’s done.  The Evil Empire is no more.  My colleagues and I helped to make it so, and it was just what was aimed for’.”

According to this, Wood knew from the beginning that his X-ray laser weapon would never work.  It was all a plan to force the Soviet Union to enter another very expensive arms race, go broke, and die.  If this was so, then who was in on the plan?  Did Wood mislead Teller before he talked Reagan into the SDI Program (which was much bigger and more expensive than Wood’s particular project).  Did Wood and Teller decide to mislead Reagan in selling the project?  Did Wood, Teller, and Reagan together decide to mislead the entire nation and the defense community in order create a scam aimed at financially bleeding the Soviet Union to death?  Where would such a conspiracy end?  This all becomes a bit mind boggling.

And what can be said about the notion that Wood and Star Wars “broke the enemy’s morale and treasury?”

In 2013 Pavel Podvig posted the results of his study of Soviet documents related to SDI and the Soviet response in Did Star Wars Help End the Cold War? Soviet Response to the SDI Program.  Who is Pavel Podvig?  He provides this description.

“Pavel Podvig is an independent analyst based in Geneva, where he runs his research project, ‘Russian Nuclear Forces.’ He is also a Senior Research Fellow at the UN Institute for Disarmament Research and a researcher with the Program on Science and Global Security at Princeton University.”

Podvig provides some conclusions from a long and heavily referenced study.

The main result of the SDI effort was to complicate and delay arms reduction progress, which was of great interest to Soviet leaders.  Nothing significant emerged from SDI, meanwhile the Soviets went about preparing new systems that would have escalated the Cold War tensions.

“The negotiation positions and policies of the Soviet state were a result of a complex process of interaction between various institutions involved in the decision-making - from the military to the defense industry and to the political leadership. On the balance, however, the documents support the view that the SDI program, while affecting Soviet policies, did not help bring the cold war closer to the end. Instead of facilitating the arms control process, SDI seriously complicated it, creating an unnecessary obstacle that the Soviet leadership, eager to move to arms reductions, had to deal with. Finally, the evidence suggests that one of the basic premises behind the SDI program - that it would be able to shift the arms race to the areas of advanced technologies, dissuade the Soviet Union from competition, and eventually provide a more stable defense-dominated environment - did not work. While the SDI program had failed to produce any result, the Soviet Union had developed and was ready to deploy a range of weapon systems that would have brought the U.S.-Soviet confrontation to a more dangerous new level.”

While the Soviet defense industries and military did take note of SDI, it was viewed more as a justification to procure new capabilities for which they had already planned than as a threat to be dealt with.  Any actual new spending was minor compared to military spending in total.

“The issue of the Soviet own program that was produced in response to SDI brings a question of whether the burden that it imposed on the Soviet economy was a factor in the decision of the Soviet leadership to initiate reforms or even in accelerating the demise of the Soviet Union. The answer to this question is most certainly negative. While the package of anti-SDI programs was supposed to be a massive effort, comparable in scale to its U.S. counterpart, very few of these projects were actually new. The most expensive programs….existed long before SDI. When they became part of the….[anti-SDI] programs, they did not require any additional commitment of resources. Most of the projects included in the package never went beyond paper research and those that did were among the least expensive ones. Overall, while the military spending was certainly putting a heavy burden on the Soviet economy, there is no evidence that SDI or the Soviet response to it increased that burden in any substantial way.”

The role of SDI in Soviet history will probably remain controversial.  There are those in politics who will attribute to Reagan all successes whether or not he had anything to do with them.  And frustrated scientists will always try to extract a victory of some sort from a defeat.

With his incautious remarks, Wood put himself in a curious position in order to emerge from his defeat.  His comments suggest that either he perpetrated a fraud on the nation, wasting a lot of the taxpayers’ money and potentially elevating Cold War tensions, or he was a key participant in a massive plot to induce an expensive response from the Soviet Union. 

There is another explanation—a more obvious one.  It seems most likely that Wood and his team got carried away with enthusiasm for their project and failed to adequately assess the potential difficulties.  Highly intelligent people sometimes mistakenly assume they can think their way through any difficulty.

Wood also discusses other issues in Vance’s article.  Perhaps an indication of his approach to complex problems can be found there.  Consider his thoughts on geoengineering as a way to combat global warming.

“Wood, for example, is of the mind that global warming can be stopped relatively quickly and inexpensively through geoengineering.”

“He seems most bullish on the idea of using high-altitude balloons to release particles of sulfur or some other substance that would, in effect, provide shade for the planet.  He’s convinced that this would not only be feasible but would also come with few, if any, consequences.  ‘All these sort of things involve capital investments on the order of $10 billion, but people are talking about going out and spending $1 trillion a year to cope with global warming, and they’re not even doing a very good job of it,’ Wood says.”

Wood is rather casual in concluding such experiments would have “few, if any, consequences.”  In fact, he views these as defined solutions rather than experiments, as if one could predict all known effects.  His sulfate idea is a particularly risky experiment.  There is no way of using small scale experiments to represent what might occur in a global event.  And the concentration of sulfates would have to be maintained for years before one can assess what the outcome might be. 

Those who support such schemes tend to point to volcanic eruptions as a reason why we should not be worried about consequences.  Volcanoes erupt, the earth is shielded from the sun and life goes on.  What’s the problem?  The problem is that volcanoes do have significant consequences.  The climate does change.  Any change in the distribution of energy from the sun reaching the earth will cause climate changes, and one cannot predict accurately what they will be.  Any geoengineering process will go on forever, not fade away after a few years.  There will be winners and losers.  Locally, rainfall and temperatures will change and alter the ability to raise food crops.  The lives of hundreds of millions of people could be put at risk.  More on this topic can be found here.

And all of this will occur while continuing to spew carbon dioxide into the atmosphere because we chose a potentially easy way out of the climate problem.  Continued absorption of carbon dioxide by the oceans will have dramatic consequences.

Here we have Lowell Wood claiming he can solve a tremendously complex problem with a simple solution.  That is presumably what happened in his Star Wars misadventures.  Two such events are enough to define a trend.

Just as we learned that bankers and other financiers can be blinded by over-confidence and a lust for money and put the world at risk, we need to learn that over-confidence and a lust for prestige on the part of scientists can also put the world at risk.

Choose your scientists wisely.

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