I.8 Assets and banking

(from the larger project of an introductory approach to Ecological macroeconomics)

Chapter 7 established money as a claim on exchange value. It also went through the roles money plays in the economy (medium of exchange, unit of account, and store of exchange value), and its attributes (storable, easily divisible, transportable, hard to produce, and widely accepted). Underneath it all was money’s macroeconomic role as a coordinating mechanism, the way in which items with exchange value are passed along through the production process toward becoming items of use value, and the way items with use value are distributed to various actors in the economy.

It also looked at one source of money, which is a sovereign state (a government) declaring a particular thing to be money, and then producing that form of money.

But it turns out that most money in a modern economy is actually produced by the banking system, rather than by the government. Yet at the same time, that bank money is backed by state money, through the functioning of what’s called the central bank.

The goal of this chapter is to lay out the function of the banking system and its role in creating money, but part of that functioning is the role of assets, so we’ll start with an overview of what assets are and the major types of assets.

The discussion of banking will start with the relatively simple mechanics of check-clearing, before going on to bank balance sheets, the creation of money, and the role of reserves and state-issued money.

The last two items to address in the chapter are the backing of money, and a closer look at the disposition of income that was touched on in Chapter 7.

Assets
Banking
  - Checking transactions
  - Bank balance sheet
  - Reserves
What stands behind money
Disposition of income

Did I get that right?

I just heard that Obama has nominated Sen. Max Baucus to be our next ambassador to China.

The report described Baucus as Montana's longest-serving senator, first elected in 1978.

The 72-year-old announced earlier this year that he would not be seeking re-election, saying that he wanted to spend more time in his home state.

Which is why he accepted a nomination to be ambassador to China ...

Maybe he thought the line about "I want to spend more time with my family" was past its sell-by date, so he tried something different.

Best NSA response ever

This morning my 11-year-old son was making his lunch while the radio played in the background, and they mentioned the story about the NSA keeping an eye on World of Warcraft.

From the kitchen I heard, "What ...?" Then Ben came to the living-room door, cream cheese in hand, with his mouth agape in surprise. He recovered enough to observe, "Well, at least they're probably not spying on Club Penguin."

I guess ...

http://www.fanpop.com/clubs/club-penguin/images/31983089/title/waddle-around-xd-photo

The problem of Whoville

Depending on when you grew up and whether you have kids, you might have missed the Dr. Seuss clasic Horton hears a Who. That's the one about the elephant who hears a cry of help from a speck of dust floating by, and discovers (through his remarkably sensitive hearing) that there's a whole community of tiny people called "Whos" who live on that speck.

Horton vows to protect them and tries his best, in the face of social disapprobation instigated by a bossy kangaroo and her joey. He climbs over mountains and searches through a whole field of clover to rescue them, only to be captured and caged. The one clover with the Whos is about to be dropped into hot oil when finally the little creatures scream loud enough that the kangaroo can hear them herself.

Suddenly everyone is all grins and friendship, and the kangaroo and her joey declare their intention to protect the Whos through all sorts of weather. They even adopt Horton's oft-repeated mantra, "A person's a person, no matter how small."

Now, I think I get Dr. Seuss's message (which apparently makes me better at reading comprehension than Ted Cruz). And I fully support the sentiment behind it: As humans, we're entitled to certain rights—period.

And yet ... At the end of the book, the kangaroos are holding the precious clover, and keeping an umbrella over it. Um, if they're spending all their time looking out for the Whos, how are they going to gather their own food?

Advice from an old guy

This post is a follow-up for my introductory macroeconomics class, on the heels of our discussion this morning. I had them read this account of one woman's experience with long-term unemployment. I also sent them to this collection of case studies from the 1920's, documenting families coping with prolonged or repeated spells of unemployment, and asked them to write a couple pages comparing two of the earlier cases with the modern one. In the conversation, I also referenced Larry Summers' recent remarks about secular stagnation (covered here by Kevin Drum), looking back on 5 years of a week labor market and seeing more of the same for several years ahead. By the afternoon, I felt the need to try and provide a different perspective, maybe a more optimistic one.

Today’s conversation in both classes was more of a downer than I expected or meant it to be. It’s got to be tricky (or hard, or depressing, or discouraging—different responses for different people) to be 18 or 20 years old, and some middle-aged dude is having you read and talk about stuff that doesn’t have a clear way out.

And as I said—maybe a couple of times in each class—I don’t know what the answer is (and it’s a little early to expect you to have that one figured out for yourselves). But I wanted to share some perspective that became clearer for me after a little time away from the conversation (and after some food).

The first thing is to see that there are two distinct types of problems: a physical one and a social one. And there are two time scales: relatively soon (the next 10 years), and long (more than that).

The physical picture is mixed. On the positive side, our technological capabilities keep advancing. Every year, we understand more about how nature works, and find new ways of applying that knowledge to something that matters to us (or that matters to some of us).

On the negative side of the ledger, we face resource constraints that are far more challenging than what earlier generations had to deal with. If we want more lumber, we can’t just go find some new piece of forest and cut it down. Well, we can, but there are reasons to think it’s not a good idea to do much more of that. If we want more oil or gas, there is more, but it comes at much higher cash cost than was true 30 years ago, and often involves more environmental impact than comes from “conventional” extraction techniques. And even if we solve that problem and find lots more fossil fuels available cheaply, it looks like the combustion of it will bring potentially horrific impacts through climate change.

So a mixed picture with a lot of negatives (I could have extended that part of the list, but I figured I’d made my point), and the only positive being the ephemeral thread of, “But we’re getting smarter at stuff!” Nonetheless, when I look at that ledger from a strictly physical side, I’m actually an optimist. Perhaps I’m ill-informed, but when I put together what I know, I can picture a way of providing a respectable life for 9 billion people, in the long run.

A numbers puzzle

In my macro classes I like to have the students study a chart of the "output gap." That's the difference between the actual GDP (what the economy did in any given quarter) and the potential GDP (the standard estimate of what the economy "should have" done in that same quarter).

A positive output gap shows an economy in some sense out-performing (and maybe running a risk of inflation), while a negative output gap is associated with high unemployment.

If you take the output gap and divide it by potential GDP, you get the gap in percentage terms, where you can meaningfully compare the economy's performance across different decades.

I've come to rely on FRED, the very useful data tool from the St. Louis branch of the Federal Reserve. They have a vast number of data series, and a fairly flexible charting tool that lets you perform calculations on the data you've chosen and get a visual representation of the results.

This past weekend I went to make a chart of the output gap, and got this (I've added the red line at 0% to make it easier to see when the gap is positive and when it's negative):

And something struck me as not right. Because I'd made the same chart sometime in 2012 (I think in the fall), and it looked like this (again, the red line at 0% is my addition):

Either the numbers they're providing for actual GDP have gone up since last year, or the numbers they're providing for potential GDP have gone down--I didn't save the numbers behind last year's chart just the chart itself, so I don't know which of those possibilities is true, but clearly at least one of them has to be.

I've wracked my brains trying to figure out why this could be, and I can't come up with anything. It's not about a change in inflation adjustments, since both series are in nominal terms. And while the Congressional Budget Office does make some revisions to past estimates of potential GDP, they tend to be modest revisions covering only the last few years, whereas these two charts show changes from beginning to end.

I'm simply perplexed.

Thinking through scarcity

A hearty thank you to the economics graduate students at the University of Missouri Kansas City, who invited me out to speak last Friday. The invitation was initiated by Brian Werner, whom I’d met at the Ecological Economics conference in Burlington in June.

UMKC’s economics department is avowedly “heterodox,” giving weight to perspectives beyond the neoclassical model that dominates most graduate education in the field (you can get a flavor at the New Economic Perspectives blog, which features work of faculty and grad students from the UMKC program). The most prominent piece of that heterodoxy is Modern Monetary Theory, which is an outgrowth of a school of thought known as post-Keynesianism. (It’s also an approach that’s had a significant impact on my own thinking in the last few years.) There’s also interest there in environmental issues, though that isn’t as thoroughgoing a concern as is the understanding of what money is and how it works.

As Brian saw it, he and his classmates were thoroughly versed in money, and also interested in environmental issues, whereas I’ve started from an ecological perspective on the economy and worked my way toward the role of money. The result was a conversation that left me with a lot to consider.

A particular point of discussion centered on scarcity and the idea that it is socially constructed—that is, not an immutable fact of life, but a function of human action. I recall two aspects of this coming up in the conversation: a demand side, and a supply side.

It seemed to me that of those, the attendees put more weight on the demand side. This challenges the conventional assertion that human wants are insatiable. In place of that idea, it posits that culture cold foster a sense of “enough,” in which case the demand for consumption—and for the resources supporting consumption—would decline, alleviating scarcity from that side.

There was also a reference to the supply side of the equation. This argument points out that resources are not inherently useful; rather, human action and ingenuity is what puts them at our service. One example would be oil, which in its raw form is a not particularly useful black gunk. But if you invent and build refineries, you can turn it into fuel, and if you invent and build internal combustion engines, you can use that black gunk to greatly increase people’s mobility.

An even more powerful example is sand. It has some useful roles as a construction material, but the invention of fiber optics it became an input that massively increased our ability to move information.

I’d like to get to the demand argument as well, but for now I’ll limit myself to that second argument, the supply one. The reason is simply that I think I have a better handle on the supply argument than I do on the demand side, so I’m giving myself a little more time for my thoughts to settle out.

Portable pleasures

A month ago we got a pair of kittens--siblings.

Just now I was reminded that the good thing about being stupid enough to chase after your own tail is that you never lack for an object to keep yourself entertained.

I.7: Money

(from the larger project of an introductory approach to Ecological macroeconomics)

No video for this chapter, at least not yet.

But there is a pull quote:

Money, in its pure form, is like chicken for a vegan, in a world where everyone is a vegan.

Here's the text:

CHAPTER 7: MONEY

With money, we move solidly into the realm where there aren’t directly analogous phenomena in other species or in ecosystems as a whole. The task is the same: there’s still a need to coordinate the actions of multiple individuals within a species, or to mesh the roles of multiple species within an ecosystem. But money as a tool for doing that is a uniquely human approach, with unique attributes.

And yet, to understand it we’re going to start by going back to those pre-human models. Because when we look at money’s role in the context of how ecosystems coordinate their activities, we do two things. First, we shed a particular light on how money works. And second, we develop a way of seeing when money doesn’t work so well.

Animal use value
Use value for humans
Exchange value
Value added
Distributing use value
Money
- What money is
- Roles of money
- Attributes of money
The value spectrum

Animal use value
Start with a familiar picture, one of the stylized versions of an ecosystem from chapter 2. [See Figure I.7.1 below.] The ecosystem is full of species that are doing things that keep the whole thing humming along nicely. But that’s not “why” they’re doing it.

As an example, look at soil organisms decomposing dead stuff that used to be living. If we had to translate the instructions in their genetic code and accompany those instructions with a rationale, their genes wouldn’t be telling them, “Break down that organic matter and make it available to plants for new growth so that everyone in the neighborhood can thrive.” No. Their genetic instructions are, “Eat that, because it’s got energy or other stuff you need in order for you to live.”

That other thing gets done: the soil organisms break stuff down and make it available for plants. But from the organism’s perspective, that’s not why it’s doing it. It’s merely doing what’s useful for its survival. The seemingly magic part is that a coevolutionary process has shaped it such that, when it does what’s good for its own survival, it’s also doing what’s good for the ecosystem.

From an animal’s perspective, the “value” of anything it does is based on how much that thing contributes to the survival of its genes. Animals are shaped by evolution such that behaviors they find useful—behaviors they choose to engage in, behaviors that have “use value” to them—are also behaviors that increase the chance of their genes making it into the next generation and beyond.

Feel the power!

For my first-year seminar on "Climate & the economy," I wanted to convey the magnitude of our energy use, but in a tactile way.

So I had all of us run up three flights of stairs.

Of course, it was a little more structured than that.

First, we measured a flight of stairs, multiplied by three, and found that we would be climbing about 44.5 feet vertically.

Second, one student "won the lottery" by wearing flip-flops, so she got to stand at the top of the stairs with a stopwatch.

And third, I'd asked all the students to know their weight (more or less)--though I wouldn't be collecting that information.

I.6: Social evolution of the economy

This one starts from the observation that living in groups is really useful, then looks at the different mechanisms humans have used to coordinate that cohabitation, starting with norms and progressing through money and credit.

Video here.

http://papasez.hubpages.com/hub/Weaver-ants-predation-and-natural-control

Now I'm worried

http://www.secretsofthefed.com/post-humanism-will-you-welcome-and-love-your-robot-overlords-wvideo/

There was a news report on our local NPR station about a company in the area that's improving computers' ability to recognize the content of messages.

Simpler systems see the word "love" and assume the message is positive, or the word "hate" and assume it's negative, and route it to what it thinks is the appropriate department for a response.

The new system can look at the message more holistically. I was cooking, so I might have missed something, but I specifically recall them saying that it could detect sarcasm.

Oh, crap. I figured that was our one insurmountable trump card when it comes to the apocalyptic battle between the machines and us.

"I love, love, love our robot overlords." [Fixes a charge to one end of the central brain machine.]

"I know, man, they're like, totally awesome." [Fixes a charge to the other end.]

KABLOOM!

...

So I guess that won't work.

Time for Plan B:

http://cheezburger.com/2327076608

I.5: The physical evolution of the economy

How the economy evolves, from hunter-gatherer societies to post-industrial economies.

Part a
Part b

I.4: The physical structure of the economy

As with chapter 3, this one is in two parts:
Part a
Part b

We finally make the jump from just looking at ecosystems, to using ecosystems as an aid in understanding how an economy is put together.

A defining moment

A couple days ago I was looking for a concise definition of an ecosystem for a class. As a first stop, I checked with Wikipedia, and what I found seemed reasonable:

An ecosystem is a community of living organisms (plants, animals and microbes) in conjunction with the nonliving components of their environment (things like air, water and mineral soil), interacting as a system. These biotic and abiotic components are regarded as linked together through nutrient cycles and energy flows. As ecosystems are defined by the network of interactions among organisms, and between organisms and their environment, they can come in any size but usually encompass specific, limited spaces (although some scientists say that the entire planet is an ecosystem).

To contrast it with an economy, if you go to Wikipedia's entry for that term, you learn that:

An economy consists of the economic system, comprising the production, distribution or trade, and consumption of limited goods and services between two agents, the agents can be individuals, businesses, organizations, or governments. Transactions only occur when both parties agree to the value or price of the transacted good, commonly expressed in a certain currency.

Hmm, that seems both a little opaque and a little too much assuming a market, to the exclusion of other ways of doing things that do actually exist. Fortunately, the words "economic system" were a link, to another Wikipedia page, which explains that:

An economic system is a system for producing, distributing and consuming goods and services, including the combination of the various institutions, agencies, consumers, entities (or even sectors as described by some authors) that comprise the economic structure of a given society or community. It also includes how these various agencies and institutions are linked to one another, how information goes between them, and the social relations within the system (including property rights and the structure of management). A related concept is the mode of production.

That's more useful, but it occurred to me that, with appropriate substitutions, their definition of an ecosystem could also serve pretty well as a definition of an economy:

An economy is a collection of human organizations (households, companies, governments, and associations) in conjunction with the natural resource base, interacting as a system. These human and non-human components are regarded as linked together through flows of matter and energy, coordinated by social norms, money, contracts, and regulations and law. As economies are defined by the network of interactions among human groups, and between human groups and natural resources, they can come in any size, but we often measure economies bounded by the borders of nation-states (although globe-spanning links have existed for centuries, and have grown much stronger since World War II).

The funny thing is, after years of chipping away at the work of melding macroeconomics with an ecological perspective, it was just a few days ago that a thought drifted through my mind, and I realized I finally had a concise definition of what it is I've been trying to do:

The economy is a biophysical process by which we provision ourselves, subject to physical laws and following ecological principles. Economics, properly understood, is the study of the social structures that control and coordinate that biophysical process.

Oddly enough, my adaptation of Wikipedia's definition of an ecosystem ends up as something like an extended version of the definition I'd come to only a couple of days earlier.

The business about it being a biophysical process is simply a reflection that any economic action has physical consequences or prerequisites. If you bought a TV, a whole series of physical actions happened, with resources being pulled out of the ground, being transformed using energy derived from other resources that have been pulled out of the ground, put on a ship, brought to the store, etc. In macroeconomics we focus on somewhat abstract aggregates of spending: consumption expenditure, investment expenditure. But every time money is laid out, something physical either already happened or is now going to happen.

This doesn't mean that economics is ecology. That's what the second sentence is for: What makes it economics is the focus on the social structures of control and coordination.

Nor does it mean that you can never do economics without taking environmental factors into account. For one thing, microeconomics can generally ignore them (unless of course you're doing environmental economics).

And there can be situations in macro where the physical environment responds in familiar ways to the actions your society undertakes, in which case you can actually ignore the environment.

But macroeconomics is the study of the system as a whole, the study of the process by which a society produces its total output. And environmental factors are a fundamental part of that process. If you don't understand how they're linked, you're going to get things seriously wrong when environmental conditions start changing.

I.3: Complex adaptive systems

Here's chapter 3, broken into two parts (for length--the total is about 16 minutes):
Part a
Part b

This is about how ecosystems are self-organizing systems that adapt themselves to changing circumstances. It's the last chapter before we get into economies.

I.2: Ecosystems - energy and matter

This is chapter 2 of the introductory macroeconomics course.

It lays out the parts of how ecosystems work that will be useful in understanding how an economy works.

CHAPTER 2: ECOSYSTEMS - FLOWS OF ENERGY AND MATTER
The previous chapter made the case for an economy having some important similarities to an ecosystem, and for resources and the environment playing a fundamental role in macroeconomics.

Every economic process uses resources in one way or another, and economic change can even be defined as a change in the way resources are used.

The next step is to study how ecosystems work. This may seem like an odd move in an economics course, but there are two reasons for doing it.

The first is that ecosystems are in some ways simpler than economies. The extra complications of economies have to do with the social tools humans create, which we’ll start getting into in chapter 6. But their role will be easier to understand if we start without them.

The other consideration is that there’s a long history of people studying ecosystems as ecosystems, and not so much of looking at economies that way, so we’re going to poach off of knowledge gained in other fields.

Chapter overview

• 1st and 2nd Laws of Thermodynamics
• Energy storage and gradients
• Functions and structures in ecosystems
• Circulation of matter vs. pass-through of energy

Missing the obvious questions

Morning Edition had an interview this morning with a member of the Board of County supervisors from Siskiyou County, in Northern California. Michael Kobseff is one of the members who voted in favor of a resolution for the county to secede from its state, along with other counties in northern California and southern Oregon, and form the new state of "Jefferson."

Kobseff's stated objection was the "burdensome regulation" from the state; its one-size-fits-all approach was designed with cities in mind and was running into the ground businesses that were decades old, some were 150 years old.

The interviewer observed that the proposed state included no major cities, no centers of economic growth. Kobseff replied that if the area were freed of burdensome regulation, it would thrive.

I've never been to Siskiyou County. I've never been to California north of San Francisco or to Oregon south of Portland (type casting!). And perhaps Mr. Kobseff is right on target. But there were two questions glaringly missing from the interview.

I.1: Economies, resources, ecology

(from the larger project of an introductory approach to Ecological macroeconomics)
Here's a video version of Part I, Chapter 1 of my macroeconomics course, setting the economy in a physical context.

(There's an unfortunate pause about halfway through.)

CHAPTER 1: ECONOMIES RESOURCES, ECOLOGY

What does an ecosystem have to do with an economy?

 

There’s a pair of straightforward answers—they may even have occurred to you. For one thing, the economy gets some important inputs from ecosystems: trees, fish, clean water, just to name a few.

 

Going the other direction, when the economy harvests trees, or pollutes, or lays down pavement, that affects ecosystems.

 

These answers aren’t wrong, but there’s another one that goes a bit deeper. That’s the idea that an economy is itself kind of like an ecosystem, or that economies and ecosystems are two instances of the same sort of thing.

Too lucky to be rich

Brad deLong is posting "deleted scenes" from his manuscript on the economic history of the twentieth century, such as this one on why the twentieth century wasn't a Chinese century. After describing the ways in which China was economically, technologically, and socially behind in 1870, after being ahead in 1200, he looks around for answers, and includes this one in the list of possibilities:

Perhaps the root problem was that with triple-cropping rice strains the wet-rice fields were too fertile, the governmental bureaucracy too effective, and the avenues of establishment-oriented upward mobility to the striving and aggressive too open. After making a little money the logical next step was to buy some land. Because the land was rich, because labor was plentiful and cheap, and because the empire was (most of the time) strong internally, one could live well after turning one's wealth into land. One could also easily make the important social contacts to pave the way for one's children to advance further. And one's children could do the most important thing needed for upward mobility: study the Confucian classics and do well on the examinations: first the local shengyan, then the regional juren, and then the national jinshi. Those who had successfully written their eight-legged essays and made proper allusions to and use of the Confucian classics would then join the landlord-scholar-bureaucrat aristocracy that ruled China and profited from the empire. In the process of preparing for the examinations and mastering the material needed to do well on them, they would acquire the habits of thought and values of a Confucian aristocrat landlord-scholar-bureaucrat. Entrepreneurial drive and talent was thus molded into an orthodox Confucian-aristocratic pattern and harnessed to the service of the regime and of the landlord class: good for the rents of the landlords, good for the stability of the government, but possibly very bad indeed for the long-run development of technology and organization. Carlson (1957) quotes an imperial edict of 1724 condemning mining as a potential source of disorder and treason, for "[M]iners are easy to recruit but hard to disband. If mining is left to the initiative of merchants there wil be danger of crowds assembling and harboring treachery…"

There may be something to it, but it also has a troubling element. Look at the three basic factors laid out in his first sentence: fertile land, effective bureaucracy, and open avenues of upward mobility. If you were to ask a random person--or even a random economist--were those where helpful factors or harmful, they'd likely say that each of them was helpful. So why are they harmful here?

Department of impenetrable logic

http://en.wikipedia.org/wiki/Ouroboros

Duncan Black calls attention to some ... interesting verbiage on Syria. Specifically, if we do take some military action, how much should it be. The source he cites gives the following edifying parameters:

One U.S. official who has been briefed on the options on Syria said he believed the White House would seek a level of intensity "just muscular enough not to get mocked" but not so devastating that it would prompt a response from Syrian allies Iran and Russia.

"They are looking at what is just enough to mean something, just enough to be more than symbolic," he said.

In his trademark style, Black just leaves it at that. But it occurs to me that the passage he quotes has reached a kind of perfection.

When you're calibrating your action so that it is "just enough to be more than symbolic," whatever action that you end up choosing will have been chosen not for what it does but for what it means. In other words, whatever action you choose will be inherently a symbol itself--a symbol that you want to do something that's more than symbolic.

Ouroboros: it's not just for medieval alchemists anymore.

http://pervegalit.wordpress.com/2010/04/19/4144/

Thinking outside the box

Brad deLong excerpted Paul Krugman's post The real trouble with economics, where PK makes the point (yet again, it seems) that many economists fail to discard their theories when empirical reality invalidates them.

One of the commenters at Brad's place observed:

It's pretty obvious that the optimum economy, the one that does the best job of the greatest good for the greatest number, is pretty much flat; there aren't any poor people and there aren't any rich people and there are a bunch of things that would make a profit (for awhile) that you're not permitted to do because it would break the system as a whole.

The political consequences of saying so in any kind of operational way are pretty severe. (Look at what happened to Occupy, which wasn't saying anything more than "How can this be fair?")

The reason the technocratic approach can't get to that optimal economy rests on a long history of blood and iron; the assumption of capitalism isn't natural, it's got as much crushing of dissent behind it as any other imperial movement. (There's probably a bunch of history PhDs lurking in the transition of political parties from ecclesiastical factions to financial ones.)

I contend that an economics discipline that looked at the problem from the perspective of "how did we get stuffed into this particular corner of the space of possible economies" along with "how do our institutions copy themselves into the future?" (that analog of sex; money is a fairly good analogy for eating, food, energy available to a biological system) would have much tougher problems and give much better answers than the one we now have, which mostly explains why those now successful must remain so.

What caught my attention was the image of being "stuffed into this particular corner of the space of possible economies."

http://petoftheday.com/talk/showthread.php?100663-Squirrel-Stuffed-in-a-Box

Theory schmeory

Paul Krugman had a post at the beginning of August riffing on a Noah Smith's reflection on the death of theory in economics. While he says that "death" is an exaggeration, he does see "a measurable decline in the number of papers that offer theoretical innovations as opposed to empirical analysis".

Krugman may well be right, but that would be a shame, because there are some basic economic issues which I think "received theory" hasn't yet really worked out. The two I'm most aware of are:

• the relation between environmental issues and the macroeconomy;
• money.

Regarding the second of those, there's the whole school of "endogenous money," parts of which make a lot more sense to me than what gets passed off in textbooks as "settled theory." The University of Missouri at Kansas City is a center of one particular strain of endogenous money, that calls itself "modern monetary theory." Krugman has traded posts with Randy Wray (the author of the primer at the previous link), and they don't see eye to eye, but there are interesting theoretical investigations going on.

And there are at least a handful of people investigating the macroeconomy-environment link. The ecologist Howard Odum made some thought-provoking inroads into economics in Environment, Power, and Society. His student Charlie Hall, along with some colleagues, advanced Odum's work a ways with Energy and Resource Quality: The ecology of the economic process. Herman Daly came at the question from a more conventional background and collaborated with Josh Farley. I've dabbled in the area as well.

What to commemorate

We've got the Fourth of July, memorializing the date we told the King where he could shove his taxes.

The Germans have German Unity Day in October, commemorating the reunification of West and East Germany after the Cold War. (It was tempting to make a big holiday out of November 9th, the day the Berlin Wall was opened in 1989, but that date had been, uh, preempted by the Nazis' tasteless use of it in 1938 to stage Kristallnacht, a giant pogrom.)

The Russians have Victory Day, celebrating the triumph over Nazi Germany.

The French have Bastille Day, commemorating that time they tore down a fortress and freed seven prisoners from a fortress that was symbolic but not of any particular real import.

And the Czechs have August 21st.

http://hrivnac.free.fr/wordpress/?p=278

Standards I might like to have applied to me

On today's Morning Edition there was a story about the multiple fraud prosecutions facing J.P. Morgan in multiple countries.

They raised the argument that the bank is such a sprawling behemoth that it can’t be expected to be able to control everything it does. They did have a clip of Bill Black contending that “You can’t have this many scandals without a complete failure to set an ethical tone at the top.”

Far more interesting, though, was Dick Bovet’s defense. “Is J.P. Morgan a well-run bank or not? We constantly hear this statement that it’s too big to be managed. Alright, J.P. Morgan makes more money than any other bank in the world other than the four big Chinese banks. It’s also making more money than 99.99% of the companies that function in the United States.”

The reporter then continues, “Bovet says that suggest the bank is being run pretty darn well.”

Well, OK then.

It’s not as if the bank were being accused of crimes that make it lose money. Its (alleged) bribery and fraud were precisely in the service of making more money. So if you point to how much money they’re making, you could just as well be measuring the extent of their criminality as how well managed they are.

I think Shakespeare had something to say about that …

Seeing what you know is true

Brad DeLong had an interesting take on technological change, productivity, growth, and Malthusian dynamics. As is often the case at Brad's place, the comments provide a significant portion of the value added. Occasionally, of course, it's value subtracted, as with the case with this comment.

The commentor is objecting to the idea that greater wealth will lead to lower fertility. Part of his concern is that the automatic fertility reduction from increased wealth won't be nearly enough to prevent problems, a concern I agree with:

Even the (few) countries in the world with falling populations have those falling SLOWLY. We're already using up all our seed corn.

...

Everyone saying there isn't a problem never gives the numbers. They tell us that in some tiny number of countries the population growth rate has gone (very slightly) negative and this is supposed to, what, I don't know, be proof that the rest of the world is going to go negative voluntarily , and soon enough for it to matter?

 But in between those two excerpts, he goes off the rails:

Default assumptions

(I recently stumbled across this on my computer. It looks like it was an email I was writing, and then decided to copy the  text and stick it in a Word document to come back to "later." Judging from the time-stamp on the file, that was in 2005. I have no idea who my correspondent was. I've stripped out the extraneous stuff from the email.)

I’ve been shifting my basic sense of where markets belong in the firmament of economic theory. In preparing my “Hunger and Excess” course for this fall, certain inadequacies of markets have impressed themselves upon me with renewed force, leading to an epiphany of sorts, which expressed itself as two contradictory facts and a reconciliation. The contradictory facts are, on the one hand the manifest faults of markets (expressed for me particularly in terms of food and environmental issues) and, on the other, the abject failure of the “non-market” of the Soviet system. The reconciliation is a recasting of why markets are good, what they’re good for, and a reassessment of their place in society.

A sensible food culture would promote moderate portions and healthy ingredients, as well as good body image, health through reasonable exercise and diet (not neuroticized forms of exercise and diet) rather than medicalizing the problem. Instead, we have market forces pushing oversized portions of undernutritious food; unrealistic body ideals; and pharmaceutical solutions to problems that are better addressed through changes in behavior. In this instance and others (most prominently the environment), the market is not merely missing the optimal outcome, it’s actually taking us away from it.

Is it enough?

In response to yesterday’s post, Anonymous liked the analogy, but added, “What I don't like is how you admit to NOT doing your part. And all after doing research and writing such a post! Stranger than fiction...”

Of course, the easiest out would have been to have lied, but I don’t think that’s what Anonymous had in mind.

Here’s the thing. While I’m almost certainly above the 2,000-Watt line that I referenced in the first post, I’m also significantly below the level of energy use for someone in a household with my income.

We have one car for a household with two drivers. Granted, we have it easier than some, since I live 1.2 miles from work and can bike or walk, leaving the car available for my wife if she needs it. But it’s still not an entirely trivial decision, as we learned when the city closed our boys’ elementary school. It had been on the way from our house to Hartwick College, and it was a few blocks from the YMCA where they sometimes have after-school lessons, so walking/biking with them was easy. Now it’s 1.6 miles. We bike sometimes in nice weather. They take the bus sometimes (though the route means it can take almost an hour to get home). We do drive them sometimes. And when the weather’s not safe for biking and one of them has something at the Y after school, my wife and I engage in some car balet to make the day work.

Scales of morality

About ten years ago I was on the edge of a conversation involving a few people of my parents' generation (though not my parents themselves). David McCullough's biography of John Adams had recently come out, and the people in the heart of the conversation had all read it. They were marveling at how moral the Founding Fathers were, and how our politicians today are nothing like that.

And of course the folks in this conversation were right. For one thing, nobody on the contemporary American political scene owns slaves (though with a few of them you wonder if they don't kinda miss the old days ... certainly some of their constituents think slaves had a good deal).

I'm not trying to engage in cheap delegitimization here. The fact that many of the founders were slaveholders doesn't invalidate their work in setting up our system of government. And besides, many people in their day considered slavery to be normal.

At the same time, full-on moral relativism doesn't cut it, either.

Priorities, people!

In my Macroeconomic Theory class, I sometimes have the students read a lecture by Robert Lucas, "Macroeconomic priorities". It is exemplary in the elegance of the analytical tools applied to the questions at hand. It is also cautionary in the way that Lucas overlooks some crucial elements of reality. When you bring those back into the picture, you do indeed learn something about what our macroeconomic priorities should be, it's just that they're not the ones that Lucas is promoting.

There are often said to be two basic issues in macroeconomics: business cycles and long-run growth. The argument in the lecture is that the gains to be had from further smoothing of the business cycle are quite small, while taxing and spending policies that promote growth would have a large, positive impact.

Lucas opens:

Macroeconomics was born as a distinct field in the 1940's, as a part of the intellectual response to the Great Depression. The term then referred to the body of knowledge and expertise that we hoped would prevent the recurrence of that economic disaster. My thesis in this lecture is that macroeconomics in this original sense has succeeded: Its central problem of depression prevention has been solved, for all practical purposes, and has in fact been solved for many decades. (p. 1; emphasis added)

In fairness to Lucas, he was writing in 2002/3, when lots of people shared his notion that we already knew how to prevent depressions. But it's also fair to point out that in 2009 Lucas was arguing mockingly against efforts to apply what we knew about how to prevent a depression. We skirted the precipice after the financial meltdown of 2008, but it was no thanks to Lucas.

Solving the wrong problem

On Friday, NPR's Morning Edition ran a story that was ... somehow I want to say "The gift that keeps on giving," but that would imply that I liked it. The problem with "Will robot nannies save Japan's economy?" started with the framing by the host.

"OK, you might think the U.S. with its high unemployment and slow growth doesn't have much advice for other developed countries when it comes to how to get out of an economic slump."

Obviously U.S. economic performance since the end of 2007 has been at first abysmal and then merely lackluster, but look at that phrase, "much advice for other developed countries." And how are those other developed countries doing?

I'm not one to mindlessly worship faster growth of GDP per capita as the surest sign of economic success, but that is the standard they set here. And in the last few years, the U.S. has done respectably in that regard, "beating out" most of the OECD, and almost all of the EU.

As for unemployment, our rate is high, but edging down. In the last few years, our unemployment rate has improved more than most OECD members.

In general, countries that have pursued "austerity"--cutting government expenditure in order to reduce government deficits--have stumbled in the last few years; the U.S. has pursued only modest austerity, and has only stumbled modestly.

I doubt there's some nefarious plan to promote austerity, though that's possible. I suspect it's more that they were looking for a clever segue, and they went with conventional wisdom. On the other hand, that would point to the idiocy of conventional wisdom among US elites.

But again, that was just the framing. The fun starts with the story itself, the premise of which is that the U.S. should be teaching Japan how to have more women stay in the labor force after having kids.

The main points are these:

The scent of money

I’m finishing up a paper on money in the context of a physical understanding of the economy at the same time as I’m reading Hölldobler and Wilson, Journey to the ants, and the juxtaposition has me thinking about how we differ from other animals, and how we don’t.

Ants have to coordinate hundreds of thousands of individuals in numerous tasks: building the nest, tending the queen, tending the brood, foraging, defending the nest, attacking other nests. There’s always some division of labor: a queen who does nothing but lay eggs, female workers who tend the eggs and gather food, and males whose only role is to mate with virgin queens (I apologize if that sounds like a pitch for a cheesy movie).

In some species, the division of labor goes further, involving multiple castes in very specific roles. In leafcutter ants, the biggest individuals are the soldiers, whose only role is to fight. Below them, the biggest workers cut pieces of leaves and bring them back to the nest. Smaller ants take those pieces and chew them up into balls of vegatative matter, which they hand over to the smallest ants, the farmers. These farmers place the vegetable balls into the masses of fungus that they tend, and disappear into tunnels too small for the other castes, reemerging with harvested fungus for the others to eat.



Leafcutter ants make a chain to bend a leaf that will form part of their nest.
https://en.wikipedia.org/wiki/Weaver_ant



Ants have found a solution for coordinating huge numbers of individuals in a relatively complex division of labor, and their solution involves a repertoire of chemical signals and behavioral cues. The means are relatively simple: If I detect aroma A, pick up the thing giving off the scent and bring it back to the nest; When I smell aroma B, follow it; If something strokes my antennae, regurgitate food.

But the results are seemingly miraculous. The system is thoroughly decentralized, with nobody in control (the queen doesn’t give orders, she just lays eggs), yet the colony as a whole exhibits what looks like purposive behavior. In some of the essays in The mind’s I, Douglas Hofstadter plays with the idea (not unique to him) of an ant colony as a superorganism, exhiiting a kind of intelligence, if not necessarily consciousness.

Humans face a similar problem of coordinating thousands or millions of individuals in a division of labor more articulated than what you see with the ants, and we have two basic solutions. One is hierarchical, anything from a tribal chief (if the chief has real authority) to the empires of the ancient world, to the nested hierarchy of European feudalism, to the “state capitalism” of the Soviet bloc.

The decentralized, non-hierarchical solution is markets.

What's an uninformed consumer?

NPR's Morning Edition had a pair of stories today relating to the negotiations that are just starting for the Transatlantic Trade and Investment Partnership, or T-TIP as the cognoscenti are fond of calling it. (Doesn't it just sound so cute?) The stories focused on two farmers, one in Delaware, the other in Burgundy.

The French farmer was not excited about competiting with U.S. agriculture:

"I'm worried about open business because [I'm] sure we will not win because it's too different," he says. "If it's open, I think in 10 years, we all disappear in France and Europe. The cost in the U.S. is less than in Europe."

The story explains that "Most American beef is banned in Europe. Only a small percentage of what is known as non-hormone treated cattle is allowed in."



http://hustavidea.cz/silena-krava



Conspicuously missing from the story was any mention of the health concerns around meat animals raised with hormones to make them grow faster, to say nothing of the heavy use of antibiotics in cattle, both to promote growth and as a prophylactic measure to more or less control the diseases that would otherwise run rampant through groups of cows living in their own dried shit and eating a grain-based diet for which the cow is not evolved. By which I mean, the story said nothing about any of that.

Bridge lessons

When I lived in Seattle from 1992 to 2002, I was fascinated by the Ship Canal Bridge that carries I-5 across the canal connecting Lake Washington to Lake Union and from there to Puget Sound.



http://www.sanfranciscoize.com/2012/04/thoughts-on-seattle-ship-canal-bridge.html

On my bike, I often wished there were a bike lane somehow suspended from the bridge, so that when I was traveling between the University District and Capitol Hill, I wouldn't have to go all the way down to water level, cross the canal on University Bridge, then make my way back up the other side.

http://cascadiadaily.com/2010/01/university-bridge/

(Well, not all the way down to the water; it's not like I had to swim. And I didn't try any Evel Knieval stunts going over it when it was open like this.)

But that notion of a bike lane in the sky was just a wistful dream. What really fascinated me about the bridge was the way it illustrated the interface between economics and engineering.

 

from http://www.vintageseattle.org/2010/10/25/jensens-u-w-aerial/,
an aerial veiw of the bridge, the UW campus, the Evergreen Point floating bridge,
and the Cascade Mountains

On each shore of the canal, the approach to the bridge is made out of ferro-concrete, and is supported by relatively closely spaced piers.

For the next section, the structure becomes steel, the spans become longer, and the piers become taller, as the land falls away toward the water and the bridge rises slightly on its way to the necessary high clearance over the canal.

Finally, in the middle of the bridge you get the longest, highest span--it has to be high to let sailboats under it, and it has to be wide to keep the bridge piers from getting in the way of the navigable waters.

The steel has a better strength-to-weight ratio, so it can reach across longer spans than the ferroconcrete. But concrete is cheaper than steel, so the ferroconcrete by itself is cheaper than the steel.

For the middle of the bridge where you need a really long span, you use the steel. For the approaches, where the ground isn't that far below you and you can use short piers, you use ferroconcrete.

But the place where you really see the economics is in the part between the approaches and the central span. You don't have to have your piers far apart, because you're still over land. But the piers are getting so tall that they're getting expensive. When you look at the bridge as a whole, you can see the point where the savings from having fewer tall piers outweighs the cost of building the spans out of a more expensive material.

Of course, this is probably oversimplifying. The other advantage of fewer piers is that you don't have to sacrifice as much stuff on the ground. There's a lot of space on the ground between those high piers to carry on normal activity (unless of course you're a plant, in which case the reduction in sunlight and rainfall is a bit of a problem).

But I suspect that the cost tradeoff of fewer tall piers vs. more expensive material played a role in the bridge's design.

The superorganism awakes

Earlier today I came into the kitchen and Kate was listening to a Radiolab rebroadcast called "Emergence," and they were talking about the way that ants individually are pretty hopeless creatures, but ants in a colony are capable of astonishing feats of purposive action.

An excavation of a massive ant colony,
from http://wutheringexpectations.blogspot.com/2011/11/i-for-one-welcome-our-new-insect.html

(This idea has been on my mind a lot lately, showing up in my talk "Is God on our side?" and also in the paper I'm finishing up on money in a biophysical conception of economics. It's also one that's lain in my brain for a while, since about 25 years ago when my brother gave me The mind's I, which has some essays making a similar point.)

Then at dinner Kate mentioned the CDC's use of Twitter to see where flu is spreading (here's a paper from a couple of years ago analyzing the potential). Doctors already report flu cases to the CDC, so that public-health officials can see the movement of the disease and try to craft better containment measures. But it turns out that Twitter allows them to get a jump on the information.

People Tweet everything, so when they're coughing and their muscles are sore, they Tweet about that. If you see a spike in those Tweets, there's a high chance you're seeing the leading edge of the flu.

But while people Tweet their pain right away, many of us don't go to the doctor until we realize just how sick we are, so it might be a week or more before our doctor has any information to send to the CDC. So careful analysis of Twitter allows the CDC to learn about the flu a week faster than before.

If we consider the whole society as an organism, it's as if we're developing a better nervous system. "Look at that--my toe is on fire. It used to take me 10 days to figure that out. Now it only takes three. Progress!"


from http://en.wikipedia.org/wiki/Eye_of_Providence

What are we evolving toward, anyway?

http://www.theonion.com/articles/anteater-to-lay-off-the-fire-ants-for-awhile,19434/

The United States of Innumeracy

Paul Krugman took apart a post by Erick Erickson, where the redstate blogger complained about a range of things, including, "the price of a gallon of milk and loaf of bread that keep going up though Ben Bernanke tells them there is no inflation."

Krugman answered with two charts, taken from the Bureau of Labor Statistics, which is the entity charged with gathering price information and calculating inflation:

 

The comments were ... interesting. People commented with higher prices where they live. Fair enough, but it doesn't disprove the data Krugman presented, which are national averages--some places are always going to be more expensive than others.

Other people reported prices going higher where they lived, which is more interesting, but hard to know what to make of without additional info.

But what really struck me were the number of people saying some version of, "Look at those charts! Those prices are going up!"

Well, the prices now are higher than the prices at the beginning of the charts, in January 2003, but look again at what Erickson wrote:

the price of a gallon of milk and loaf of bread that keep going up though Ben Bernanke tells them there is no inflation

I don't see any reading of that other than implying that prices are currently rising, and they're clearly not. Bread spiked in the middle of 2011, but it's been right around $1.40 since spring of 2008. Milk is higher than it was in the middle of 2009, but lower than in the middle of 2008. Those charts really give no evidence of any current rise.

Others comment (correctly) that a loaf of good bread might be $4, but read what the chart says: "Bread, white, pan, per pound." If you're looking at a 24-oz. loaf of quality bread, don't expect to pay $1.40 anywhere. (It's a real problem that the only bread some households can afford is of low quality, but that's not the problem that Krugman's talking about, and I suspect it's not what Erickson meant either.)

For my money, as it were, the most disheartening comment was from a user with the handle oldchemprof:

But, Professor Krugman, you own chart shows that bread cost 40% more since Obama became President than it was was when President Younger Bush took office.

What are we to think about that.

Well, other than the fact that it's not true? Lord help this person's students if he/she actually is/was a chemistry professor and is that incapable of reading a simple time-series chart. The students should ask for a refund.

Unless the issue is that oldchemprof simply doesn't know when Obama became president. In which case, it's all good, and their $40,000 tuition was totally worth it.

In the spirit of President Younger Bush, Is our voters learning?

The schismatic's brief

I'm in Burlington, VT, for the 7th biennial meeting of the US Society for Ecological Economics, which wraps up today. One of the presenters is the physicist Tom Murphy from UC San Diego, who is the proprietor of the blog Do the math.

In conversation, Tom observed that the people here represent a small minority of all the economics departments in the country. Personally, he sees a lot of sense in the basic perspective of ecological economics, including the idea that the use of natural resources is not a specialized question for a subdiscipline of economics, but is central to economics itself. But obviously that perspective is not generally shared among economists. Or as I might put it (Tom didn't), the people gathered here are schismatics among the economists.

(The meeting was held jointly with the 5th annual meeting of biophysical economics, which is sort of a schism within a schism. That's how these things go.)

Tom had a question for those of us actually in econ. Say you had a more conventional-minded economist, a sharp person open to evidence and persuasion. What argument would they make against the project of ecological economics?

I mentioned that Paul Krugman's recent textbook had a page that neatly encapsulated three fallacies about resources and the economy. Of course, not everyone agrees that they're fallacies—many economists are eye-to-eye with Krugman and see them as true statements. If you think they're fallacies, you end up at places like this meeting, among the schismatics.

On the fly in conversation, I could only remember two of the fallacies. The full set is:

1. A focus on land specifically rather than resources in general.
2. A conflation of the availability of resources within a country and the quantity of resources actually used by that country's economy.
3. An excessively abstract view of technology and capital that mischaracterizes the relationship between them and resources.

Below the fold, the original passage, and the explanation.

I'll bet you Debt to Donuts ...

There's been much well-deserved razzing of Reinhardt and Rogoff for their Excel error and their ... interesting choices about which data to exclude.

Brad DeLong did a post last week building off the work of a Berkeley grad student, Owen Zidar. Zidar put observations about countries into 50 bins of equal size, grouping observations by debt as a percentage of GDP, and looking at average growth over the following 5 years. When he plotted it, he got this chart:

Today DeLong revisited  the subject and added in a line at 90%, and then the average growth rate to the left of the line (countries with debt below 90% of GDP) and the average growth rate to the right of the line (countries with debt higher than 90% of GDP).

The moral of the story: slightly slower growth; no cliff. (And as people have been pointing out since R&R's paper in 2010, the causality isn't clear in any case.)

Looking at DeLong's modification, I was struck by those two particularly low bins just to the right of the 90% line. So if we were instead to draw the line at something like 95%, we'd take the lowest and third-lowest observations out of the "high-debt" group and put them in the "low-debt" group. And since those two dots were lower than the average in either group, the group they left would see its average go up, and the group they joined would see its average go down.

My drawing above is just an eyeballing approximation since I haven't taken the time to ask Zidar for his binned-up data, but the lines do have to move in the direction I've shown. It seems unlikely that this little shift has such a big effect that the countries with debt below 95% actually do worse than countries above, but we can say for sure that by placing the cutoff at 95% instead of at 90%, the effect of high debt moves in the direction of being trivial.

But notice something peculiar. Countries with debt greater than 90% do in fact perform worse than countries with debt greater than 95%. It's those two horrible dots between 90% and 95%.

What if we have three groups? Less than 90%, greater than 95%, and the middle. We get something like this:

Obviously, the real problem is neither high debt nor low debt, but debt in the very narrow window of 90 to 95% of GDP. That stuff's just a catastrophe. Talk about threshold effects. It's reminiscent of the "donut hole" in patient reimbursement that was built into the Medicare prescription drug benefit under GW Bush, only narrower.

Put another way, we're looking at something like this:

http://blogs.wsj.com/photojournal/2010/05/27/pictures-of-the-day-407/

The solution is clear. When your debt is approaching 90% from below, putting on the brakes might accomplish nothing useful. You'll merely slow down enough to go tumbling off the edge of the debt cliff into the 90-95 chasm. What you need to do is load up on debt big time--accelerate hard, make sure you clear the gap.

(Thanks ClipArt!)

Once you're on the other side, it's clear sailing.

Gee, it sure is a snap cooking up important public-policy findings when you know what to do with the data. Maybe I, too, can work for the Peterson Institute ...

UPDATE: Here's a post-length comment on Crooked Timber that's worth a read about the state of economics. (And the original post is short and sweet: scroll up and enjoy it.)