Alan Kirman on the fundamental micro-macro difference

18 Mar, 2015 at 13:12 | Posted in Economics | Comments Off on Alan Kirman on the fundamental micro-macro difference

 

What the Eurozone crisis has taught us

17 Mar, 2015 at 19:11 | Posted in Economics | Comments Off on What the Eurozone crisis has taught us

Ever since the establishment of the modern nation-state in the late eighteenth and nineteenth centuries, the creation of the euro was perhaps the first significant experiment in modern times in which there was an attempt to separate money from the state, that is, to denationalize currency, as some right-wing ideologues and founders of modern neoliberalism, such as Friedrich von Hayek, had defended. resized_creepy-willy-wonka-meme-generator-oh-you-have-your-own-money-you-are-soooooo-cool-a958dcWhat the Eurozone crisis teaches is that this perception of how the monetary system works is quite wrong, because, in times of crisis, the democratic state must be able to spend money in order to meet its obligations to its citizens. The denationalization or “supra-nationalization” of money with the establishment that happened in the Eurozone took away from elected national governments the capacity to meaningfully manage their economies. Unless governments in the Eurozone are able to renegotiate a significant control and access money from their own central banks, the system will be continually plagued with crisis and will probably collapse in the longer term.

Mario Seccareccia

Keynes letter to President Roosevelt

17 Mar, 2015 at 17:33 | Posted in Economics | 5 Comments

The other set of fallacies, of which I fear the influence, arises out of a crude economic doctrine commonly known as the Quantity Theory of Money. Rising output and rising incomes will suffer a set-back sooner or later if the quantity of money is rigidly fixed. Some people seem to infer from this that output and income can be raised by increasing the quantity of money. But this is like trying to get fat by buying a larger belt. In the United States to-day your belt is plenty big enough for your belly. It is a most misleading thing to stress the quantity of money, which is only a limiting factor, rather than the volume of expenditure, which is the operative factor.

John Maynard Keynes

[h/t Constance]

‘Sound finance’ — a sign of obstinate ignorance

17 Mar, 2015 at 16:59 | Posted in Economics | 1 Comment

To many conservative and neoliberal politicians and economists there seems to be a spectre haunting the United States and Europe today — Keynesian ideas on governments pursuing policies raising effective demand and supporting employment. And some of the favourite arguments used among these Keynesophobics to fight it are the confidence argument and the doctrine of ‘sound finance.’

Is this witless crusade against economic reason new? Not at all. In 1943 a famous Polish economist wrote the following in a classic essay on ‘sound finance’:

kale It should be first stated that, although most economists are now agreed that full employment may be achieved by government spending, this was by no means the case even in the recent past. Among the opposers of this doctrine there were (and still are) prominent so-called ‘economic experts’ closely connected with banking and industry. This suggests that there is a political background in the opposition to the full employment doctrine, even though the arguments advanced are economic. That is not to say that people who advance them do not believe in their economics, poor though this is. But obstinate ignorance is usually a manifestation of underlying political motives …

Clearly, higher output and employment benefit not only workers but entrepreneurs as well, because the latter’s profits rise. And the policy of full employment outlined above does not encroach upon profits because it does not involve any additional taxation. The entrepreneurs in the slump are longing for a boom; why do they not gladly accept the synthetic boom which the government is able to offer them? It is this difficult and fascinating question with which we intend to deal in this article …

We shall deal first with the reluctance of the ‘captains of industry’ to accept government intervention in the matter of employment. Every widening of state activity is looked upon by business with suspicion, but the creation of employment by government spending has a special aspect which makes the opposition particularly intense. Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment). This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis. But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness. Hence budget deficits necessary to carry out government intervention must be regarded as perilous. The social function of the doctrine of ‘sound finance’ is to make the level of employment dependent on the state of confidence.

Michal Kalecki Political aspects of full employment

David K. Levine’s sad gibberish

16 Mar, 2015 at 22:17 | Posted in Economics | 4 Comments

50cf9626f2deeIn the wake of the latest financial crisis many people have come to wonder why economists never have been able to predict these manias, panics and crashes that haunt our economies.

In responding to these warranted wonderings, some economists – like theoretical economist David K. Levine in the article Why Economists Are Right: Rational Expectations and the Uncertainty Principle in Economics in the Huffington Post – have maintained that
 

it is a fundamental principle that there can be no reliable way of predicting a crisis.

To me this is a totally inadequate answer. And even trying to make an honour out of the inability of one’s own science to give answers to just questions, is indeed proof of a rather arrogant and insulting attitude.

Fortunately yours truly is not the only one racting to this guy’s arrogance:

Steve Blough trolls me this morning over on the Twitter Machine about the truly remarkable ignorance of economics professor David K. Levine:

I confess I am embarrassed for my great-grandfather Roland Greene Usher, who sweated blood all his life trying to help build Washington University in St. Louis into a great university, that WUSTL now employs people like David K. Levine:

Levine, you see, appears to believe that we live not in a monetary but in a barter economy. And so Levine claims that the Friedmanite-monetarist expansionary policies to fight recessions that recommended by Milton Friedman cannot, in fact, work:

David K. Levine: The Keynesian Illusion:
I want to think here of a complete economy peopled by real people … a phone guy who makes phones, a burger flipper, a hairdresser and a tattoo artist…. The burger flipper only wants a phone, the hairdresser only wants a burger, the tattoo artist only wants a haircut and the phone guy only wants a tattoo…. Each can produce one phone, burger, haircut or tattoo…. The phone guy produces a phone, trades it to the tattoo artist in exchange for a tattoo, who trades the phone to the hairdresser in exchange for a haircut, who trades it to burger flipper in exchange for a burger. All are employed… everyone is happy.

Now suppose that the phone guy suddenly decides he doesn’t like tattoos enough to be bothered building a phone…. Catastrophe. Everyone is unemployed…. The stupid phone guy… is lazy and doesn’t want to work…. The burger flipper would like to work making burgers if he can get a phone, the hairdresser would like cut hair if he could get a burger and the tattoo artist would like to work if he could get a haircut and yet all are unemployed …

Maybe the government should follow Keynes’s [note: Levine means “Milton Friedman’s” here] advice and print some money…. Then the phone guy can buy a tattoo, and the tattoo guy can buy a haircut and the haircutter can buy a burger, and the burger flipper — ooops… he can’t buy a phone because there are no phones…. [Perhaps] the burger flipper realizes he shouldn’t sell the burger because he can’t buy anything he wants… and we are right back… with everyone unemployed…. Maybe he doesn’t realize that and gets left holding the bag… a Ponzi scheme…. It seems like a poor excuse for economic policy that our plan is that we hope the burger flipper will be a fool and be willing to be left holding the bag.

DKL’s argument that Friedmanite-monetarist expansionary policies cannot cure a downturn is, I believe, correct — if the downturn is caused by a sudden outbreak of worker laziness, an adverse supply shock that reduces potential output.

Expansionary monetary policy in such a situation will indeed produce inflation. People’s expectations of the prices at which they will be able to buy are disappointed on the upside as too much money chases too few goods. It is not clear to me why DKL calls this a “Ponzi scheme” rather than “unanticipated inflation”.

But does anybody — save DKL — believe that an extraordinary and contagious outbreak of worker laziness is what caused the downturn that began in 2008?

No.

Everybody else believes that the downturn that began in 2008 occurred not because of a supply shock in which workers suddenly became lazy but because of a demand shock in which the financial crisis caused nearly everybody in the economy to try to rebuild their stocks of safe, liquid, secure financial assets. Everybody else believes that the right way to model the economy is not the barter economy of DKL — trading phones for tattoos, etc. — but as a monetary economy, in which people hold stocks of financial assets and trade them for currently-produced goods and services.

This matters.

This matters a lot.

Brad DeLong

Stephen Williamson on involuntary unemployment and search models

16 Mar, 2015 at 20:21 | Posted in Economics | 4 Comments

An employment contract, like marriage, requires that two people agree. If one would-be party to the contract does not agree, then it doesn’t happen. We could talk about people being involuntarily single, I suppose, but the relevant behavior we are interested in, I think, is the search behavior. contractAn unemployed person is engaged in active search for employment. Old-fashioned ways of thinking about that – in competitive equilibrium environments – didn’t get very far, as those models are not equipped to think about search. Search models allow one to think about unemployment in a useful way. Those models are more enlightening about the determinants of unemployment, and how governments might help labor markets work more efficiently. But people in those models are always making choices. The unemployed are people who choose to search for work because they think there is light at the end of the tunnel – potentially they will find a job that will make them better off. So voluntary or involuntary doesn’t enter into the discussion.

Stephen Williamson

Now this seems to me as bad and wrong-headed a defense of Lucas denial of involuntary unemployment as the one given a couple of years ago by Michel DeVroey:

What explains the difficulty of constructing a theory of involuntary unemployment? Is it, as argued by Lucas, that the “thing” to be explained doesn’t exist, or is it due to some deeply embedded premise of economic theory? My own view tilts towards the latter. Economic theory is concerned with fictitious parables. The premises upon which it is based have the advantage of allowing tractable, rigorous theorising, but the price of this is that important facts of life are excluded from the theoretical universe. Non-chosen outcomes is one of them. The underlying reason lies in the trade technology and information assumptions upon which both the Walrasian and the Marshallian (and the neo-Walrasian and neo-Marshallian) approaches are based. This is a central conclusion of my inquiry: the stumbling block to the introduction of involuntary unemployment lies in the assumptions about trade technology that are usually adopted in economic theory.

Foregoing the involuntary unemployment claim may look like a high price to pay, particularly if it is admitted that good reasons exist for believing in its real world relevance. But would its abandonment really be so dramatic? …

First of all, the elimination of this concept would only affect the theoretical sphere. Drawing conclusions from this sphere about the real world would be a mistake. No jumps should be made from the world of theory to the real world, or vice-versa … The fact that solid arguments can be put forward as to its real world existence is not a sufficient condition to give involuntary unemployment theoretical legitimacy.

Michel De Vroey

nonsequitur090111

I have to admit of being totally unim-pressed by this rather defeatist methodological stance. Is it really a feasible methodology for economists to make  a sharp divide between theory and reality, and then treat the divide as something recommendable and good? I think not.

Models and theories should — if they are to be of any real interest — have to look to the world. Being able to construct “fictitious parables” or build models of a “credible world,” is not enough. No matter how many convoluted refinements of concepts made in the theory or model, if they do not result in “things” similar to reality in the appropriate respects, such as structure, isomorphism etc, the surrogate system becomes a substitute system — and why should we care about that? Science has to have higher aspirations.

Mainstream economic theory today is in the story-telling business whereby economic theorists create mathematical make-believe analogue models of the target system – usually conceived as the real economic system. This modeling activity is considered useful and essential. Formalistic deductive “Glasperlenspiel” can be very impressive and seductive. But in the realm of science it ought to be considered of little or no value to simply make claims about the theory or model and lose sight of reality. Insisting — like De Vroey — that “no jumps should be made from the world of theory to the real world, or vice-versa” is an untenable methodological position.

Now, Williamson refers explicitly to search models as allowing one “to think about unemployment in a useful way.” Buyt what kind of theory are we talking about here? Taking a methodological look at search theory I think its shortcomings becomes open to everyone.

When criticizing the basic (DSGE) workhorse model for its inability to explain involuntary unemployment, its defenders maintain that later elaborations — especially newer search models — manage to do just that. However, one of the more conspicuous problems with those “solutions,” is that they — as e.g. Pissarides’ ”Loss of Skill during Unemployment and the Persistence of Unemployment Shocks” QJE (1992) — are as a rule constructed without seriously trying to warrant that the model immanent assumptions and results are applicable in the real world. External validity is more or less a non-existent problematique sacrificed on the altar of model derivations. This is not by chance. For how could one even imagine to empirically test assumptions such as Pissarides’ ”model 1″ assumptions of reality being adequately represented by ”two overlapping generations of fixed size”, ”wages determined by Nash bargaining”, ”actors maximizing expected utility”,”endogenous job openings”, ”jobmatching describable by a probability distribution,” without coming to the conclusion that this is — in terms of realism and relevance — nothing but nonsense on stilts?

In that perspective I do think its pretty obvious that the kind of search models Williamson has in mind don’t take us very far in thinking about unemployment “in a useful way.”

Lecturing the Senate Budget Committee

15 Mar, 2015 at 15:56 | Posted in Economics, Politics & Society | 8 Comments

blythWatch Mark Blyth give the Senate Budget Committee a well-earned lecture on public debt here. Absolutely fabulous!

Varoufakis’ unbelievable blunder

15 Mar, 2015 at 15:28 | Posted in Varia | 4 Comments

Perhaps at another time and place, appearing in the Paris Match magazine with his wife in a lifestyle photo spread, wouldn’t be a big deal for Greek Finance Minister Yanis Varoufakis. But these days? Hmm …
 
varoufakis_twitter-630x400
 

And thus the native hue of resolution
Is sicklied o’er with the pale cast of thought

gre
 
Added March 16: According to Times Of Change, Varoufakis has now stated that he regrets the photo-shoot and “would have liked for that shoot to not have happened.”
Regret noted.
End of story.

David Andolfatto and the Chicago dismissal of ‘involuntary unemployment’

15 Mar, 2015 at 13:42 | Posted in Economics | 3 Comments

David Andolfatto doesn’t like it when I say that some unemployment is involuntary. Here is my response:

David

I am happy with the way you characterize my beliefs in the first paragraph of your blog. Unemployment is clearly not Pareto optimal.  Everything you say after that is at best misleading and at worst dismissive of everything we (at least some of us) learned from Keynes.

types-of-unemploymentThe idea of involuntary unemployment was introduced by Keynes in the General Theory. But you already knew that. It is defined as a situation where (in modern language) the ratio of the marginal disutility of work to the marginal utility of consumption is not equal to the real wage. That seems a pretty accurate description of the equilibrium outcome of labor search models.

Bob Lucas cast a spell over the profession in a series of papers in the 1970s. You are accurately summarizing Bob’s view. That view was tied to a three decade long campaign by economists predominately located in Chicago, Minnesota and Rochester (at the time) to discredit Keynesian economics. Tom Sargent reputedly advised his students not to read the General Theory. That was a tragic mistake and we are still suffering from the consequences.

You are right to assert that the important distinction is between equilibria that are Pareto optimal and those that are not. You are wrong to assert that the term ‘involuntary unemployment’ has no useful meaning.

I accept your categorization of the allocation of time between three competing ends. Every family, and every member of that family, chooses every day whether they will choose to participate in the labor force. As long as they are in the labor force, they may be employed or unemployed. Those who are unemployed do not choose that state. They must wait for a job offer to appear. In some states, that job offer may take a couple of days to arrive. In others, it may take a couple of years. The activity of waiting for a job, even when it involves active search, can meaningfully be called involuntary unemployment.

The dismissal of ‘involuntary unemployment’ from the lexicon of the modern economist was introduced as part of a deliberate attack on Keynesian economics. It is time to roll back that attack. As I have shown here, ‘involuntary’ unemployment is a useful way of distinguishing unemployment that is part of a social optimum, from unemployment that is not.

Roger Farmer

 

There are unfortunately a lot of mainstream economists out there who still think that price and wage rigidities are the prime movers behind unemployment. What is even worse — I’m totally gobsmacked every time I come across this utterly ridiculous misapprehension — is that some of them even think that these rigidities are the reason John Maynard Keynes gave for the high unemployment of the Great Depression. This is of course pure nonsense. For although Keynes in General Theory devoted substantial attention to the subject of wage and price rigidities, he certainly did not hold this view.

Since unions/workers, contrary to classical assumptions, make wage-bargains in nominal terms, they will – according to Keynes – accept lower real wages caused by higher prices, but resist lower real wages caused by lower nominal wages. However, Keynes held it incorrect to attribute “cyclical” unemployment to this diversified agent behaviour. During the depression money wages fell significantly and – as Keynes noted – unemployment still grew. Thus, even when nominal wages are lowered, they do not generally lower unemployment.

In any specific labour market, lower wages could, of course, raise the demand for labour. But a general reduction in money wages would leave real wages more or less unchanged. The reasoning of the “classical” economists was, according to Keynes, a flagrant example of the “fallacy of composition.” Assuming that since unions/workers in a specific labour market could negotiate real wage reductions via lowering nominal wages, unions/workers in general could do the same, the classics confused micro with macro.

Lowering nominal wages could not – according to Keynes – clear the labour market. Lowering wages – and possibly prices – could, perhaps, lower interest rates and increase investment. But to Keynes it would be much easier to achieve that effect by increasing the money supply. In any case, wage reductions was not seen by Keynes as a general substitute for an expansionary monetary or fiscal policy.

Even if potentially positive impacts of lowering wages exist, there are also more heavily weighing negative impacts – management-union relations deteriorating, expectations of on-going lowering of wages causing delay of investments, debt deflation et cetera.

So, what Keynes actually did argue in General Theory, was that the “classical” proposition that lowering wages would lower unemployment and ultimately take economies out of depressions, was ill-founded and basically wrong.

To Keynes, flexible wages would only make things worse by leading to erratic price-fluctuations. The basic explanation for unemployment is insufficient aggregate demand, and that is mostly determined outside the labor market.

The classical school [maintains that] while the demand for labour at the existing money-wage may be satisfied before everyone willing to work at this wage is employed, this situation is due to an open or tacit agreement amongst workers not to work for less, and that if labour as a whole would agree to a reduction of money-wages more employment would be forthcoming. If this is the case, such unemployment, though apparently involuntary, is not strictly so, and ought to be included under the above category of ‘voluntary’ unemployment due to the effects of collective bargaining, etc …
The classical theory … is best regarded as a theory of distribution in conditions of full employment. So long as the classical postulates hold good, unemploy-ment, which is in the above sense involuntary, cannot occur. Apparent unemployment must, therefore, be the result either of temporary loss of work of the ‘between jobs’ type or of intermittent demand for highly specialised resources or of the effect of a trade union ‘closed shop’ on the employment of free labour. Thus writers in the classical tradition, overlooking the special assumption underlying their theory, have been driven inevitably to the conclusion, perfectly logical on their assumption, that apparent unemployment (apart from the admitted exceptions) must be due at bottom to a refusal by the unemployed factors to accept a reward which corresponds to their marginal productivity …

Obviously, however, if the classical theory is only applicable to the case of full employment, it is fallacious to apply it to the problems of involuntary unemployment – if there be such a thing (and who will deny it?). The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight – as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics. We need to throw over the second postulate of the classical doctrine and to work out the behaviour of a system in which involuntary unemployment in the strict sense is possible.

J M Keynes General Theory

 

On the optimum level of public debt

14 Mar, 2015 at 09:03 | Posted in Economics | 4 Comments

The failure of successive administrations in most developed countries to embark on any vigorous policy aimed at bringing down unconscionably high levels of unemployment has been due in no small measure to a ‘viewing with alarm’ of the size of the national debts, often alleged to be already excessive, or at least threatening to become so, and  by ideologically urged striving toward ‘balanced’ government budgets without any consideration of whether such debts and deficits are or threaten to become excessive in terms of some determinable impact on the real general welfare. darling-let-s-get-deeply-into-debtIf they are examined in the light of their impact on welfare, however, they can usually be shown to be well below their optimum levels, let alone at levels that could have dire consequences.

To view government debts in terms of the ‘functional finance’ concept introduced by Abba Lerner, is to consider their role in the macroeconomic balance of the economy. In simple, bare bones terms, the function of government debts that is significant for the macroeconomic health of an economy is that they provide the assets into which individuals can put whatever accumulated savings they attempt to set aside in excess of what can be wisely invested in privately owned real assets. A debt that is smaller than this will cause the attempted excess savings, by being reflected in a reduced level of consumption outlays, to be lost in reduced real income and increased unemployment.

William Vickrey

The committee to save the world

13 Mar, 2015 at 16:54 | Posted in Politics & Society | 2 Comments

comSaving the world? The moral-ethical calibre of at least two of these guys makes me wonder how one could even entertain such a bizarre idea.

Re Greenspan, yours truly can’t but agree with Paul Krugman — he isn’t just a bad economist, he’s a bad person. What else can one think of a person that considers Ayn Rand — with the ugliest psychopathic philosophy the postwar world has produced — one of the great thinkers of the 20th century? A person that even co-edited a book with her — maintaining that unregulated capitalism is a “superlatively moral system”. A person that in his memoirs tries to reduce his admiration for Rand to a youthful indiscretion — but who actually still today can’t be described as anything else than a loyal Randian disciple.

And Summers — well an economist who writes that he has

always thought that under-populated countries in Africa are vastly UNDER-polluted, their air quality is probably vastly inefficiently low compared to Los Angeles or Mexico City

and that

only the lamentable facts that so much pollution is generated by non-tradable industries (transport, electrical generation) and that the unit transport costs of solid waste are so high prevent world welfare enhancing trade in air pollution and waste.

certainly isn’t on my toplist of would-be world saviours …

Meeting Kieslowski

13 Mar, 2015 at 15:39 | Posted in Varia | Comments Off on Meeting Kieslowski

 

Ricardian equivalence — a hopelessly unrealistic curiosum

13 Mar, 2015 at 09:28 | Posted in Economics | Comments Off on Ricardian equivalence — a hopelessly unrealistic curiosum

Barro (1974) has shown that, given perfect foresight, debt neutrality will obtain when three conditions are met: (a) private agents can lend and borrow on the same terms as the government, (b) private agents are able and willing to undo any government scheme to redistribute spending power between generations, and (c) all taxes and transfer payments are lump sum, by which we mean that their basis of assessment is independent of private agents’ decisions about production, labour supply, consumption, or asset accumulation. Under these extreme assumptions, any change in government financing (government saving or dissaving) is offset one-for-one by a corresponding change in private saving itself financed by the accompanying tax changes.

aatical-economics-are-mere-concoctions-as-imprecise-as-the-john-maynard-keynes-243582All three assumptions are of course hopelessly unrealistic. Condition (a) fails because credit rationing, liquidity constraints, large spreads between lending and borrowing rates of interest, and private borrowing rates well in excess of those enjoyed by the government are an established fact in most industrial countries. These empirical findings are underpinned by the new and burgeoning theoretical literature on asymmetric information and the implications of moral hazard and adverse selection for private financial marketsl1; and by game-theoretic insights of how active competition in financial markets can yield credit rationing as the equilibrium outcome.

Condition (b) fails because it requires either that agents must live for ever or else effectively do so through the account they take of their children and parents in making gifts and bequests. In reality, private decision horizons are finite and frequently quite short …

Condition (c) fails because in practice taxes and subsidies are rarely lump sum …

I conclude that the possible neutrality of public debt and deficits is little more than a theoretical curiosum.

Willem Buiter

The Larry Summers Memo

12 Mar, 2015 at 12:51 | Posted in Economics, Politics & Society | 3 Comments

The Memo

DATE: December 12, 1991
TO: Distribution
FR: Lawrence H. Summers
Subject: GEP

larry-summers-is-sleepy-three-thumb-480x350‘Dirty’ Industries: Just between you and me, shouldn’t the World Bank be encouraging MORE migration of the dirty industries to the LDCs [Less Developed Countries]? I can think of three reasons:

1) The measurements of the costs of health impairing pollution depends on the foregone earnings from increased morbidity and mortality. From this point of view a given amount of health impairing pollution should be done in the country with the lowest cost, which will be the country with the lowest wages. I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that.

2) The costs of pollution are likely to be non-linear as the initial increments of pollution probably have very low cost. I’ve always though that under-populated countries in Africa are vastly UNDER-polluted, their air quality is probably vastly inefficiently low compared to Los Angeles or Mexico City. Only the lamentable facts that so much pollution is generated by non-tradable industries (transport, electrical generation) and that the unit transport costs of solid waste are so high prevent world welfare enhancing trade in air pollution and waste.

3) The demand for a clean environment for aesthetic and health reasons is likely to have very high income elasticity. The concern over an agent that causes a one in a million change in the odds of prostrate cancer is obviously going to be much higher in a country where people survive to get prostrate cancer than in a country where under 5 mortality is is 200 per thousand. Also, much of the concern over industrial atmosphere discharge is about visibility impairing particulates. These discharges may have very little direct health impact. Clearly trade in goods that embody aesthetic pollution concerns could be welfare enhancing. While production is mobile the consumption of pretty air is a non-tradable.

The problem with the arguments against all of these proposals for more pollution in LDCs (intrinsic rights to certain goods, moral reasons, social concerns, lack of adequate markets, etc.) could be turned around and used more or less effectively against every Bank proposal for liberalization.

Postscript

After the memo became public in February 1992, Brazil’s then-Secretary of the Environment Jose Lutzenburger wrote back to Summers: “Your reasoning is perfectly logical but totally insane… Your thoughts [provide] a concrete example of the unbelievable alienation, reductionist thinking, social ruthlessness and the arrogant ignorance of many conventional ‘economists’ concerning the nature of the world we live in… If the World Bank keeps you as vice president it will lose all credibility. To me it would confirm what I often said… the best thing that could happen would be for the Bank to disappear.” Sadly, Mr. Lutzenburger was fired shortly after writing this letter.

Mr. Summers, on the other hand, was appointed the U.S. Treasury Secretary on July 2nd, 1999, and served through the remainder of the Clinton Admistration. Afterwards, he was named president of Harvard University.

The Whirled Bank Group

Understanding public debts and budget deficits

12 Mar, 2015 at 12:30 | Posted in Economics, Politics & Society | 1 Comment
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