Contractionary policy in times of high unemployment: pain with or without a purpose?

I always enjoy having a look at the latest issue of The Economists' Voice, a unique e-journal of short articles, comments and letters.
   In the first issue of 2011, Barbara Bergmann has a brief letter about Brad DeLong's column "Pain without Purpose". In his piece, DeLong admitted that he could not understand why so many people in North America and Europe want to prolong high unemployment with contractionary policies. He writes:

when you listen to the speeches of policymakers on both sides of the Atlantic, you hear presidents and prime ministers say things like: “Just as families and companies have had to be cautious about spending, government must tighten its belt as well.”And here we reach the limits of my mental horizons as a neoliberal, as a technocrat, and as a mainstream neoclassical economist. Right now, the global economy is suffering a grand mal seizure of slack demand and high unemployment. We know the cures. Yet we seem determined to inflict further suffering on the patient.

   Bergman responds with the hypothesis that "The Pain Has a Purpose, Namely, Higher Profits". Here's an excerpt:

1. The business community has considerable influence on what governments do and don’t do.
2. Globalization has decreased the concern that managements of large corporations used to have for the well-being of the people in the high-wage economies.
3. The prolonged high unemployment is having the effect of putting downward pressure on wages in the high-wage countries. It is also increasing productivity, as the remaining workforce is being worked harder.
4. That will likely result in higher profits, both now and in the future.
5. The business community likes that.

Unfortunately, this seems like a plausible hypothesis.

RH

Dean Baker on the union maid

As I've noted before, unions get little attention in the micro principles textbooks. In the Canadian edition of Mankiw on my bookshelf, unions appear in one paragraph as a cause of unemployment. That's it.
   In contrast, Dean Baker has a nice column in The Guardian pointing out that the union membership of the maid in Dominique Strauss-Kahn's New York hotel might have been of critical importance in preventing her from becoming unemployed -- by giving her enough protection against arbitrary firing to make a complaint.

RH

Economists and conflict of interest: the documentary "Inside Job"

I finally got a DVD of the fine documentary on the 2008 bubble collapse/financial crisis/recession Inside Job, whose website, incidentally, contains a wealth of information. (You can watch the movie for free on YouTube here.) It's very well done and, particularly if you're an American, you should make sure you see it and that your library has a copy.

The movie shows the deep corruption in the financial industry and, in turn, its corrupting influence on the political and regulatory system, with very costly consequences for the society --  nothing there was really new to me.
   What I wanted to note here, though, was what it had to say about the conflicts of interest that those economists have when taking money or other rewards while serving this corrupt system. The narrator says that the financial services industry "has corrupted the study of economics itself" (at 1:22:35 of the film). It asserts that academic economics played an important role in providing intellectual cover for the deregulatory movement that it claims played a role in facilitating greater risk-taking, and they got paid for it and for producing propaganda. Martin Feldstein, Frederic Mishkin, Glenn Hubbard, and particularly John Campbell, the chair of the economics department at Harvard, made a mistake when they agreed to be interviewed for the film. (Laura Tyson, Richard Portes and Larry Summers, among others, were smarter and didn't agree to be interviewed.)
   When the question of 'conflict of interest' comes up, Hubbard, the Dean of Columbia Business School says that when people do research they should disclose whether there would be a financial conflict and then (laughably) claims that "there would be significant professional sanctions" for failure to put such a thing in a paper, although he does not dispute that there is no policy in that regard. The filmmakers then ask Frederic Mishkin (Hubbard's colleague at Columbia Business School) about a paper he wrote (and was paid $124,000 to write), touting Iceland's "financial stability". He did not indicate in the paper that he was paid to write it. If there were "significant professional sanctions" applied to Mishkin, the filmmakers forgot to mention it.
  At 1:30 in the film, John Campbell, the chair at Harvard, declares that he sees no reason why faculty members should disclose who is paying them money for consulting, being on Boards of Directors, and so on. They come back to him at 1:32:30 and ask him a question that leaves him literally unable to reply. You have to see it for yourself, if you haven't already.

Ambushed

  But the influence of business on economists, particularly those in business schools, runs deeper than just who is getting paid how much to consult, write papers or serve on Boards. The institutions themselves wallow in corporate money and in Canada many of them have even sold their names to rich businessmen or companies. Are these places from which we can expect a critical analysis of the role of business in society?

RH 

Canadian Asbestos: tip of tail still wags dog

When writing my chapters in The Economics Anti-Textbook, probably nothing got me more worked up than the things I read about the murderous asbestos industry and the politicians-without-principle who cater to it, particularly the Canadian ones. Space constraints being what they are, I only wrote a page about it (pp.161-162), but I thought it made a good example of what happens when poor and asymmetric information meet Mancur Olson's dictum about how 'there is a systematic tendency for 'exploitation' of the great by the small' (p.111).
   Today, the CBC's website has a brief report in its 'offbeat' section (reserved for 'Man bites dog' stories) about The Daily Show's mockery of Asbestos, Quebec, a town with an asbestos mine.

The story also has some more serious information, noting how despite considerable opposition, the Quebec government last month approved a loan guarantee for the company running the asbestos mine, which will enable it to expand production considerably.

Mining Asbestos 

[image taken from The Mesothelioma Herald story reporting on the Quebec mine]

   The original CBC report, from 13 April, has a remarkable subheading in it: 'Opinions divided on asbestos' and states "Several studies have linked asbestos dust with cancer and lung disease. Its proponents say the product can be safely used when handled properly, and under certain conditions." Several studies?! Writing this suggests that perhaps the finding of a link is preliminary and not overwhelmingly established. (Some facts about mesothelioma can be found here.) And who are "its proponents"? It tactfully doesn't say that they are just that scourge of the modern world, industry flacks who will say anything for money.


RH