Alex Berezow is a hack: good old fashioned Red hysteria

As the ballot counting in the Seattle City Council race shows Socialist Alternative candidate Kshama Sawant gaining a narrow lead over incumbent Democrat Richard Conlin, there is now a surge of national media attention on Kshama. This also includes the American media’s love of treating mainstream economics as gospel and creating a strawman of what socialism is.

Alex Berezow’s column “Why Is Seattle Socialist Kshama Sawant Allowed To Teach Economics?” typifies this. There are many things wrong with the column, both in terms of economics and in terms of journalism.

1. He admits that he doesn’t cover economics much. Given that he cites N. Gregory Mankiw, the author of the main survey course economics textbook, I assume he doesn’t have a formal background in it either.

2. He states that “people respond to incentives” and says it is basic and obvious. This is mostly to contrast to his conception of socialism, where there are “little (if any) incentives”. As anyone who reads the books and listens to the lectures of 21st century behavioral economists can tell you, incentives are complex and often depend on variables that aren’t obvious like money, time, or capital.

3. He fails to recognize that socialism has plenty of incentives, they are just different incentives than a normal market capitalist economy. To think that capitalist motives are inherent and self-evident, one would have to explain the many societies throughout the world and history that functioned well without the same view of value and worth.

4. He blithely ignores the respected place socialist theory has in academic disciplines, like philosophy, literature, political science and, yes, economics. He compares socialism in economics to AIDS denial in microbiology. Academic institutions do not keep teaching courses on socialism and its related branches because they just don’t get it. They do it because it’s a valuable part of the process and its critiques help people understand capitalism, consumerism, and the market in proper context.

5. He fails to understand the simple difference between unionizing Amazon and collectivizing Amazon. Here’s the nickel tour on that: what Sawant wishes to do is unionize companies like Amazon that have resorted to underhanded tactics to quash workers wishing to organize. She aims for workers to collectively bargain for pay and conditions, which they currently cannot. To collectivize it would mean to liquidate its private ownership and turn over all the capital, land, and money to the workers. These are radically different things.

6. He follows Mankiw once again on rent control, never once stating that while popular, Mankiw was an economic adviser during the George W. Bush administration, and has a strong conservative bias. In fact, he was in the news this week for a bogus comparison between having children and choosing a car. The large opposition to rent control in orthodox economics is countered in other social sciences and in people who have different values beyond economic efficiency.

This all creates this insidious argument of how dare a college think a socialist should teach economics. Berezow freely admits that she has a doctorate in economics, yet thinks that using that education to critique capitalism and market economics is somehow a wrong that should be righted. It reeks of attempts to silence academic freedom when teachers have unpopular ideas. But if you don’t let anyone with unpopular ideas teach, then there is no dissension, no debate. The social sciences and humanities cease to have any value. Marxist economist Richard D. Wolff often talks of how much pressure there is on colleges to deny tenure to economics professors who don’t think capitalism is a good system- after all, most big donations come from people who made (or inherited) their money through capitalism. Do you think Phil Knight, founder of Nike and a huge source of the University of Oregon’s buildings and programs, wants an economics professor pointing out the horrible system of child labor and dangerous factories that made him all his money?

So this is a piece by a journalist who took the lazy route to bash a socialist. Kshama Sawant has more education in economics, and more background in academia than Berezow. His attempts to make her ideas look stupid come off as childish and smug. The idea that there is a scientifically validated bloc of mainstream economists (of which Mankiw is the leader) pays a disservice to the discipline and all the credible people who offer criticism and alternatives.

And if people do respond to incentives, why did they show up in huge numbers to vote against capitalism as it stands? What is there incentive there?

 

Kicking the economy for the heck of it

The partial (but substantial) government shutdown has been 24/7 news in the United States. One can approach the impasse from a Constitutional perspective, or discuss the role of government, or how the country should manage its budget and deficit. However, I will shift to a different focus.

The government shutdown is both an immediate and long-term hit to the already tepid economy.

An important thing to realize is that in the neoliberal age where everything is globalized and competition is more level than ever, being the only country with a federal government on time-out is a huge disadvantage. Complex economies are not divided into a purely public and a purely private sector. The Los Angeles Times reports that furloughs and paralysis are already rippling through the private sector– because plenty of private companies require public subsidies, operate out of government-owned buildings or land, or have the government as their major customer.

With regards to the high-tech industry that is so coveted and lucrative, the United States is the only research power that just stopped a lot of its research, or made future funding delayed indefinitely. As scientists explain in a AskScience reddit thread, the shutdown means that grants will be delayed, as will second and third-year funding. If you do field work that can only be done in a certain annual window, funding needs to be guaranteed well in advance. User 99trumpets states from experience that “Anybody who has submitted a proposal for a new grant should (IMHO) have a fallback plan in mind for other support for 2014” and says from the 1995 shutdown “We were in the 3rd year of a three-year NSF grant and the Year 3 funding normally would have been released in October. Even though the shutdown ended in January, we did not finally get our funds till THE FOLLOWING JULY.” After a 2012 presidential campaign that emphasized economic competition with China, having the huge portion of research that requires government funding on hold just means the new innovations and patents will come from them. And if the US gains a reputation as being unreliable, many projects may look for other nations for aid.

A while back, I discussed the important of “industrial production and capacity utilization” in judging economic health. Essentially, what portion of a nation’s economic bits are actually being used, versus standing idle? Idle tools and buildings just depreciate and become outdated, so an inefficient use of them has long term production and employment effects. Well, with this shutdown there is a lot of buildings that are shuttered, transport and tools left unused, and as the effects spread the private sector will replicate what was seen immediately with things like the National Parks. But this isn’t connected to the huge global recession that is still causing turmoil in Europe. This is an unforced error, unique to one country. Everybody else doesn’t have this handicap. Japan will not close down a portion of their office space in order to be fair.

And finally there’s the cutting in food assistance to pregnant women, and other parts of the welfare apparatus, which compounds a collapse in consumer spending. Needy people will shift more (or all) of their money towards food and rent, at the expense of everything else. Also a millionish government workers will have a similar shift.

So besides the idea of fixing the budget or restoring honor and accountability to Washington (heh), there’s the simple fact: any shutdown is an economic hit that didn’t need to happen. You can shift funding, rebalance budgets. But you can’t flip the ‘off’ switch in a bottling factory at any point. If you just do it in the middle of things, it’s going to be a disaster because everything is sensitive and the processes are complex.

Is the minimum wage harmful? Probably not.

The issue of note in the past few weeks has been the minimum wage, especially as fast food workers are becoming more vocal about how untenable their lives are making just north of seven dollars an hour. Some outlets have pointed out the potential price hikes if a move was made to a $15/hr wage, and there has been a chorus of conservative economists and politicians stating that a higher minimum wage actually increases unemployment, and thus makes certain people worse off as they lose their low wage job for no job at all.

When I took AP Economics my junior year of high school, we used an immensely popular textbook by conservative economist N. Gregory Mankiw. It taught the standard version of introductory economics. It’s rooted in classical economics, and features elegant graphs. It triumphs rational choice theory, or the idea that individuals consistently make the most sensible choice for their overall well-being

Parts of the American left have few good things to say about Mankiw. Beyond that, the issue is that his model doesn’t reflect the real world. Behavioral economists have clearly proven that individuals are not rational, and groups even less so. Looking at in-depth data, it’s clear that the immensely complex world economy does not fit elegant graphs most of the time.

In this debate over a higher minimum wage, there is one flaw of the conservative line. The blog An Economic Sense states simply that there is no empirical research that shows a correlation between a higher minimum wage and higher unemployment. Like many policy changes, it fades into the noise of the economic system. Rory Sutherland, a marketing executive and behavioral economist says that mainstream economics suffers from a case of “physics envy” (video). You can’t isolate individual cogs in the economy and figure out their relations to everything else. Minimum wage policy is not a proton at a particle accelerator- you can’t figure out all of its effects in a controlled environment.

Raising the minimum wage does not create a whole new burden to be shouldered by private industry. The government has to cover these people already through food stamps and Medicaid. Large corporations like McDonalds and Wal-Mart are indirectly subsidized by the government, despite large profits that prove they are not a dollar an hour away from bankruptcy.

John Maynard Keynes had a large set of theories about how the system worked- with data in the decades following his death proving some and disproving others. Famously, he disputed the classical idea that workers only needed to adjust their demands to be employed, and that all unemployment was voluntary.

It’s now clear that some unemployment is involuntary, especially in a near-recession as the United States is now. There are many reasons why people cannot find work, and it is doubtful that the minimum wage is the primary reason. More people could probably provide more labor than their wage if they were hired, but worker value in a large firm is difficult to measure, and the people who run businesses are not always rational. Or rather, they look towards profit rather than output.

The lesson here, which is hammered home every time someone on TV quotes from that economics textbook I had, is that the economy is far more complicated than some would let the public believe. If the minimum wage is an economic problem, it doesn’t show up in current data. It may just be a figment of a theory that just doesn’t make much sense.

For sale, office space, never used

The long recession has led to a discussion on economic statistics. In particular, what is evidence of a recovery and what is not. The Dow Jones index isn’t a reflection of the national or international economy, just the health of thirty large companies. And employment statistics as usually reported in the media aren’t useful- the U3 rate doesn’t count “discouraged workers” who leave the labor force due to the economy being too bad to look for work. The rate can go down in a very good economy (more jobs), and a very bad economy (so few jobs people don’t bother to look). And in the event of the latter turning around, the rate spikes as people get back into the labor force. Oy.

When I went to see prominent socialist economist Richard D. Wolff speak two years ago, he recommended a metric reported by the Federal Reserve every month. Called “industrial production and capacity utilization,” it measures how much capital, land, office space, etc. is actually being used to create goods, and how much is standing idle.

Capacity utilization rates over time

The above graph shows the difference between what is being produced and what can be produced at that point in time. The production measurements are set at 100 during the highest level of production- right before the 2007-08 recession. At that time, actual capacity was about 125% of current output. The bottom graph shows the percentage of capacity being used. Historically it’s around 80% in America, but it fell to 66% after the economy cratered. It’s still weak- even a couple percentage points below average is a massive amount of capital and land- and thus a massive amount of jobs.

My anecdotal evidence to support this comes from office space in Silicon Valley. After the economy crashed and credit dried up, many companies based in the Bay Area either went under or contracted dramatically. That led to whole office buildings- big ones, often new- being vacant with large signs advertising bargain-basement space. In 2013, a lot of these buildings have tenets, but rarely are they full on all floors. It’s clear that there is still capacity available- you could expand your business quite a bit without having to actually build anything- but conditions are not what they were before the crash.

It seems that unemployment is more explainable though this than the often contradictory unemployment figures. If a large amount of space, land, tools, inventory is still sitting idle from five years ago, that leads to a corresponding gap in labor use versus capacity.

Now, there are good reasons that capacity utilization is never 100%. Businesses are failing all the time, even if the economic climate is good. Just because you have tools doesn’t mean they’re good enough to compete with. And running machines 24/7 causes wear and requires expensive replacement- which may not be ready. It’s also clear that putting people to work is not a question of physical stuff- it’s also about competition, and how a corporation works. Just because you could employ more people and fill up all that cheap office space doesn’t mean it’ll be more profitable. It’s why economists who advocate for infrastructure projects have a point- some useful employment doesn’t fit into a business model. Capital is sometimes used because of government incentives and subsidies, rather than a calculation by the finance department.

As time goes on, the unused machinery will become obsolete, and the buildings will become dilapidated. Getting little use out of them just makes the investment for the future all the more costly.

When an economy sinks a revolution

(credit Civil-Military Fusion Centre)

The revolutionaries who ousted long-time President Hosni Mubarak demanded bread and social justice, but after two-and-a-half years of military and Muslim Brotherhood rule, the government has made little progress towards those goals.

Al Jazeera English has a comprehensive feature on the economic problems that Egypt has faced in the aftermath of the 2011 revolution. The issues are myriad, mostly rooted in bad debt and low international confidence in the Egyptian pound or their ability to pay back loans. It does raise the question of how a political revolution can keep itself intact, given that some economic hardship is guaranteed.

Economist Ahmed Ghoneim sums up the issues when he says “[Morsi’s administration] was only thinking of politics, not the economy.” While the Muslim Brotherhood had persisted as a political entity for over eighty years, they were unable to address fundamental problems and have ministers that were both loyal to the Brotherhood and skilled at their job. Ultimately that political support begins to dry up, as the unemployment rate, GDP per capita growth rate, and currency value begin to worsen.

Revolutions like those in Egypt also suffer from what could become a self-fulfilling prophecy. The chaos and danger of large-scale protests, police and military action, and political upheaval can be deadly to tourism and foreign financing. The feature describes the shop owners, travel agents, and museum guides without clients, and large loans from the IMF and other Islamic countries being difficult to secure due to risk and a lack of backing from large banks. If there are economic roots in the 2011 upheaval, they are difficult to solve in the aftermath. Cutting corruption and getting new diplomatic ties can help, but it may not be enough.

I think of how many Latin American and African revolutions have been reversed when economic progress was promised, then not delivered. While a lack of democracy and civil rights are a key reason that revolutions happen, demand for bread and jobs are just as powerful reasons- if often implicit.

The lack of focus and direction in Egypt’s post-revolution economy was where Morsi’s political skills withered. The kind of things a good economic minister does are not politically popular. They are not the things you win elections running on- tax increases, harsh adjustments to please foreign lenders- but they are how you solve systemic problems. Hopefully a new administration will understand that.

There is a quote attributed to various great leaders, that a society is three missed meals away from anarchy. Ultimately it comes down the basics. If it gets bad, it doesn’t matter who’s in power, or what they believe or promise.

 

Changing the world with pocket change

Ever since I saw his talk at TED 2009, I’ve come to like the perspective of marketing executive Rory Sutherland. His major thesis is that value is more subjective than we tend to think, and thus we can increase value and happiness through ways that don’t cost all that much money or labor. In this talk he applies the thesis to the environmental movement- with enough understanding of what humans value and what makes them happy, you can keep a high level of happiness with fewer material goods. Fewer trees cut down, less plastic in the ocean, a more sustainable energy system.

A later talk, called “sweat the small stuff” talks about how effect and cost are too often assumed to be correlated. The idea that big change could be ingenious and cheap is not in the contemporary vocabulary. In fact, he ends with this graph and asks the audience to name the grey quadrant.

Trim-Tab2

This is not to state that massive social problems do not at some level require a large amount of money and labor. But the point is that if the big parts of a process are a train- the capital, the manpower, and overall goal; then the small stuff are the rails- language, cultural understanding, small-level behavior. If you’re part of the WHO, and you’re trying to eradicate a disease in Pakistan, it’s not just the vaccines and workers. How do you get the population to vaccinate their children? How do you make it universal? How do you avoid clashes with local authorities? This isn’t just a question of money, it’s about understanding other people and encouraging cooperation.

Government programs need comprehensible forms and processes, corporate products need packaging and instructions. If you give machinery to a developing country, it’s not just teaching locals to use it, but also how they will continue to use it and not sell it for scrap. What divides a billion dollars of foreign aid money from being useless (except for a few lucky government officials) or incredibly powerful are small details.

What’s the cost of expanding landfill and increasing cleanup efforts? In contrast, think of how much money was spent changing “garbage” on kiosks in restaurants and airports to “landfill.” Changing human decisions in the small scale may seem trivial at first glance, but in the aggregate it’s key to improving the Earth.

North Korea: in case of economic collapse, what’s plan B?

I’ve just finished Nothing to Envy: Ordinary Lives in North Korea by Barbara Demrick. This was on a reading list for people interested in the country as the best starting point. And it totally is. Rather than reading like a more detailed version of the Wikipedia entry, it uses first-person accounts of people living in and around the northern industrial city of Chongjin to both flesh out the character of the country, as well as counter a couple of stereotypes most people have. The opening chapter- about how this famous juxtaposition:

(credit: PlantetObserver/Science Photo Library)

isn’t just about the economic collapse of North Korea after the Berlin Wall fell. To some, the darkness was liberating, a veil of privacy in a society where every other person is an informant. It has romance, despair, hope, idealism. Definitely read it, even if you’re not much interested in the country.

The story of North Korea in the 1990s is remarkable. Never has an industrialized country deteriorated so fast without a war rolling through. Lack of subsidized fuel from the Soviets led to factory slowdown and closure, rationing and eventual end to electrical service in most parts of the country, and a famine that killed perhaps two million people. No one’s really sure- one reason for the famine was that some international aid organizations did not provide much aid (being unable to verify if it got to the right people), and others saw their bags of food snatched up by the military. What the story does paint is that in places like Chongjin (an industrial city with very little agricultural land), it eventually devolved into an everyone-for-themselves society, where people were unable to help the starving because they had nothing to give.

What did happen in the 1990s was capitalism. Not a top-down Deng Xiaoping style of capitalism, but the grassroots kind that emerges when things get desperate. North Korea’s system has traditionally been like Cuba’s- people make very small salaries, but going to work gets you food coupons and there’s a state-run system to redeem them and keep people fed. Due to the deindustrialization of the 90s (which also applies to agriculture as well as industry), the jobs stopped paying salaries, and the state-run stores ran out of food. This was the case starting in 1994, the year Kim il-Sung died, and persisted for several years. Thus a parallel system to get people food sprang up- markets. People would forage for food, make their own, or smuggle stuff from across the border with China. Then there would be farmer’s markets where people bartered or used what hard currency they had.

Once things got better (not good, but better), the leadership used a heavy hand on these markets, and people engaging in capitalist activity often found themselves in labor camps. A currency reform that prevented people from transferring their savings to the new currency ruined a lot of the entrepreneurs that had succeeded. Capitalism managed to take this in stride, as this move wrecked confidence in the new North Korean won, and now foreign currency is more prevalent than ever.

It’s interesting to see a form of socialism collapse in function if not in name or politics. Yes, a government allocation system may actually be a pretty good idea in some cases- I’m at least somewhat a socialist, and it can have its benefits. But what if the allocation system goes beyond inefficient or corrupt, to gone altogether? The last 15 years has been North Korea trying to reestablish central planning without having the money to back it up. Capitalism is like ivy- it creeps into a country with an economic vacuum.

North Korea isn’t just a place of appalling human rights violations, silly propaganda, and antiquated military hardware- it’s also a story of how people adapt and survive. And how economic policies can have life or death consequences. The permitting of local markets, the shuttering of local markets, the punishment of smugglers and entrepreneurs, and the attempt to assert state control through currency confiscation- people have suffered or prospered because of it.

In our economy, local or otherwise, how do we get necessities? And if that doesn’t work, what’s plan B? If parts of the system collapse, what would we do?

The long run is…

The long run is a misleading guide to current affairs. In the long run we are all dead. -John Maynard Keynes

Economics is sometimes thought to be a science that can predict the future. Certain inputs, certain past trends, they come together to crystallize and make the future known.

Yet, the idea of a long run is silly. In time our lives will change and exist in a new set of conditions. But this is not really the ‘long run’ because the long run implies stability and predictability. In reality, we live in a succession of short-runs where things can change quite a bit.

The long run is the economic equivalent of settling down in life. It assumes that individuals will stop all this nonsense and behave rationally. And perhaps an individual could choose that path. But society is the life of the party, and having too much fun to slip into this “long run.”